10-K 1 innovativefood10k123112.htm innovativefood10k123112.htm


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, 2012
 
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 x 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 $2,349,520 as of  June 30, 2012, based upon a closing price of $0.40 per share for the registrant’s common stock on such date.
 
On March 5, 2013,  a total of 6,127,075 shares (post reverse-split) of our common stock were outstanding and 6,277,033  shares (post reverse-split) issued.
 
 
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, 2012
 
ITEMS IN FORM 10-K
 
 
PART I
PAGE
     
Item 1.
4
Item 2.
9
Item 3.
9
Item 4.
9
     
 
PART II
 
     
Item 5.
10
Item 6.
11
Item 7.
11
Item 8.
20
Item 9.
49
Item 9A.
49
Item 9B.
50
     
 
PART III
 
     
Item 10.
51
Item 11.
53
Item 12.
56
Item 13.
57
Item 14.
58
     
 
PART IV
 
     
Item 15.
59
     
 
62
 
 
 
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 500,000 (post reverse-split)  shares of our common stock.

On May 18, 2012, the Company executed a Stock Purchase Agreement to acquire all of the issued and outstanding shares of Artisan Specialty Foods, Inc., an Illinois corporation (“Artisan”), from its owner, Mr. David Vohaska.  The purchase price was $1.2 million, with up to another $300,000 (with a fair value of $131,000) payable in the event certain financial milestones are met over the next one or two years.  The purchase price was primarily financed via a loan from Alpha Capital in the principal amount of $1,200,000.  Prior to the acquisition, Artisan was a supplier and had sold products to the Company.
 
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 US Foodservices, Inc. (“USF”),  has been in the business of providing premium restaurants with the freshest origin-specific perishables,   specialty food products, and healthcare products shipped directly from our network of vendors within 24 – 72 hours. Our customers include restaurants, hotels, country clubs, national chain accounts, casinos, hospitals 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 holds all the companies' intellectual property including the Artistre® line of products.  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 7,300  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, most direct, 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
 
 
Customer Service and Logistics
 
Our “live” chef-driven customer service department is available by telephone Monday through Thursday, from 8 a.m. to 6 p.m. and on Friday from 8 a.m. to 5 p.m., Florida time. The team is made up of six  chefs and culinary experts who are full-time employees of the Company, and who are experienced in all aspects of perishable and specialty products. By employing chefs and culinary experts 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. Foods

In February 2010, one of our subsidiaries, Food Innovations, signed a new contract with U.S. Foods (“USF”).  This  contract with USF expired on December 31, 2012.  However, the contract provides that it automatically renews for an additional 12-month term unless either party notifies the other in writing 30 days prior to the end date of its intent not to renew. Inasmuch as neither party gave the requisite notice, the agreement was automatically extended through December 31, 2013.  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”). During the twelve months ended December 31, 2012 and 2011, sales to USF accounted for 76.0%  and 93.3% of total sales, respectively.
 
Growth Strategy
 
While the U.S. economic recovery remains fragile, there appears to be much for the restaurant industry to celebrate. According to the National Restaurant Industry’s 2013 forecast, restaurant sales are expected to grow by 3.8%, exceeding $6.5 billion.   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. We may consider  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  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 39 full-time employees, including 6 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 a major customer and related economic dependence information is set forth (1) following our discussion of Liquidity and Capital Resources, (2) Concentrations of Credit Risk in Note 2 to the Condensed Consolidated Financial Statements, and (3) as the fourth item under Risk Factors.
 
How to Contact Us
 
Our executive offices are located at 3845 Beck Blvd., Naples, Florida 34114;  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
 
Prior to 2012, We Have a History of Losses Requiring Us To Seek Additional Sources of Capital
 
As of December 31, 2012, we had an accumulated deficit of $5,177,106.  We cannot assure you that we can 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. 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.
 
 
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 was scheduled to expire in December 2012 but was automatically extended for an additional 12 months. Our sales through USF’s sales force generated gross revenues for us of $14,138,685  in the year ended December 31, 2012, and $10,754,467 in the year ended December 31, 2011. Those amounts contributed 76.0%  and 93.3%  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 negatively 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% or 9.99% depending upon the particular note 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.  If we were unable to pay the notes when required, the note holders could commence legal action against us and foreclose on almost 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 is January 1, 2009.  On November 11, 2011, the Company extended the lease with Grand Cypress Communities, Inc. for 3 years, commencing on January 1, 2012.  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.  In February 2013, the lease agreement was amended to a two year lease ending December 31, 2013.  
 
On May 7, 2012, we entered into a three-year lease with David and Sherri Vohaska for approximately 18,700 feet of office and warehouse space located at 8121 Ogden Avenue, Lyons, Illinois.  The annual rent under the lease is approximately $8,333 per month for the first year, $8,417 per month for the second year, and $8,500 for the third year. David Vohaska is currently an employee of the Company and prior to the acquisition of Artisan Specialty Foods, Inc. was the owner of Artisan.

On October 1, 2011, the Company entered into a month-to-month lease with Grand Cypress Communities, Inc. for warehouse space consisting of 2,000 square feet at 3845 Beck Blvd., Naples, Florida.  The commencement date of this lease is October 1, 2011.  The monthly rent and fees under this lease is $848.

On March 8, 2013,we purchased a building and property located at 28411 Race Track Road, Bonita Springs, Florida 34135.  The property consists of approximately 1.1 acres of land and close to 10,000 square feet of combined office and warehouse space.  The purchase price of the property was $770,000 and was financed in part by a five year mortgage in the amount of $546,000.  The Company intends to relocate all of its office and warehouse facilities into the newly acquired building in Bonita Springs, Florida in mid 2013.

ITEM 3. Legal Proceedings

None.  
 
ITEM 4. Mine Safety Disclosure
 
Not Applicable.
 

 
 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".  6,277,033 shares of our common stock were outstanding as of March 5, 2013.  The following table sets forth the high and low closing sales prices (post reverse-split) 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, 2012
 
HIGH
   
LOW
 
First Quarter
 
$
0.390
   
$
0.230
 
Second Quarter
   
0.705
     
0.250
 
Third Quarter
   
0.640
     
0.200
 
Fourth Quarter
   
0.448
     
0.246
 

Fiscal Year Ending December 31, 2011
 
HIGH
   
LOW
 
First Quarter
 
$
0.460
   
$
0.320
 
Second Quarter
   
0.430
     
0.180
 
Third Quarter
   
0.480
     
0.350
 
Fourth Quarter
   
0.440
     
0.290
 

The quotations listed above reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. On March 19, 2013, the closing price of our common stock as reported by the OTC Market was $0.26.

Security Holders

On March 5, 2013,  there were approximately 95  record holders of our common stock. In addition, we believe there are at least several hundred additional 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, 2012, the Company had the following transactions:

The Company issued 150,000 shares (post reverse-split) of common stock with a value of $37,500 pursuant to the Haley  Acquisition Agreement.

The Company committed to issue 26,078 shares (post reverse-split) of common stock for settlement of a note.  The fair value of $7,302 is included in Common Stock Subscribed on the Company’s balance sheet at December 31, 2012.

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  six months year carried restrictive legends.
 
Dilutive Securities and Derivative Liabilities
 
As of December 31, 2012 and December 31, 2011, the Company had outstanding convertible notes payable in the aggregate principal amount of $2,147,749 and $1,109,481, respectively, with accrued interest of $759,053  and $693,085, respectively, which, if converted to common stock, will result in our issuance of approximately 7,256,844  and 4,437,928 shares (post reverse-split) of common stock, respectively, at conversion rates ranging from $0.25 to $1.00 per share (post reverse-split).  
 

The Company has issued warrants for holders to purchase an additional 6,964,000 and 5,464,000 shares (post reverse-split) of common stock at December 31, 2012 and 2011, respectively.  

The Company also has outstanding stock options to purchase an additional 2,070,000 and  1,570,000 shares (post reverse-split) of common stock at December 31, 2012 and 2011, respectively.  

Securities Authorized for Issuance Under Equity Compensation Plans
 
As of December 31, 2012 the Company we did  not  have any equity compensation plans. The following shares are issuable pursuant to individual employment arrangements:

Plan Category
 
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(post reverse-split)
   
Weighted-average exercise price of outstanding options, warrants, and rights
(post reverse-split)
   
Number of securities remaining available for future issuance under equity compensation plans (excluding securities 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
   
1,540,000
   
$
0.350
     
N/A
 
Stock options
   
132,500
   
$
0.380
     
N/A
 
Stock options
   
132,500
   
$
0.450
     
N/A
 
Stock options
   
132,500
   
$
0.475
     
N/A
 
Stock options
   
132,500
   
$
0.480
     
N/A
 
Total
   
2,070,000
   
$
0.375
     
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 were valued at issuance utilizing the Black-Scholes valuation method, and were re-valued at each period ending date, also using the Black-Scholes valuation method.  Any gain or loss from revaluation was charged to operations during the period.

On December 27, 2012, the Company entered into agreements (the “2012 Notes Payable Extension Agreement”) affecting the terms of certain of its convertible notes payable. One of these changes established a minimum conversion price for these notes of $0.05.  Under accounting guidance provided by FASB ASC 815-40-05, this resulted in a change in accounting method for  these instruments from derivative accounting to equity accounting.   The Company revalued these instruments at December 27, 2012 using the Black-Scholes valuation method. Any gain or loss in value was charged to operations.

(a) Warrants:
 
The Company valued warrants using the Black-Scholes valuation model.  Warrants were valued upon issuance, and re-valued at each financial statement reporting date; they were also valued at December 27, 2012, at which time the Company changed its method of accounting for these instruments from the derivative method to the equity method.  The fair value of the Company’s outstanding warrants at December 27, 2012 was $2,088,475. This amount was considered a component of the Company’s gain on the extinguishment of debt, in the total amount of $3,797,001 during the twelve months ended December 31, 2012.
 
The following table illustrates certain key information regarding our warrants and warrant valuation assumptions at December , 2012 and 2011:

   
December 31,
 
   
2012
   
2011
 
Number of warrants outstanding (post reverse-split)
   
6,964,000
     
5,464,000
 
Value at December 31
   
N/A
   
$
500,825
 
Number of warrants issued during the period (post reverse-split)
   
1,500,000
     
-
 
Value of warrants issued during the year
 
$
572,765
   
$
-
 
Revaluation (gain) loss during the period
 
$
172,785
   
$
(682,350
                 
Black-Scholes model variables:
               
Volatility
   
112.43% - 214.36
%
   
92.52% - 114.30%
 
Dividends
 
$
0
   
$
0
 
Risk-free interest rates
   
0.11% - 1.18
%
   
0.06% - 0.17
%
Term (years)
   
0.01 - 8.00
     
0.01-5.00
 

(b) Embedded conversion features of notes payable:
 
 
Through December 27, 2012, the Company accounted 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 2012 Notes Payable Extension Agreement resulted in a change in accounting method for  these instruments from derivative accounting to equity accounting.  The Company revalued these instruments December 27, 2012 using the Black-Scholes valuation method. Any gain or loss in value was charged to operations.

The following table illustrates certain key information regarding our conversion options and valuation assumptions at December 31, 2012 and 2011:

   
December 31,
 
   
2012
   
2011
 
             
Number of conversion options outstanding (post-reverse split)
   
5,368,195
     
4,437,928
 
Value at December 31
 
$
N/A
   
$
1,245,761
 
Number of options issued during the year (post-reverse split)
   
1,200,000
     
-
 
Value of options issued during the year (post-reverse split)
 
$
263,664
   
$
-
 
Number of options exercised or underlying notes paid during the year
   
3,419,284
     
2,053,240
 
Value of options exercised or underlying  notes paid during the year
 
$
81,921
   
$
623,837
 
Revaluation loss (gain) during the period
 
$
281,024
   
$
(595,967
                 
Black-Scholes model variables:
               
Volatility
 
112.43% to 214.36
 
92.52% to 114.3
Dividends
   
0
     
0
 
Risk-free interest rates
   
0.11 to 1.18
%
   
0.06 to 0.17
%
Term (years)
   
1.1 to 10.00
     
10.00
 

(c)   Stock options:
 
The Company accounted for options in accordance FASB ASC 718-40.  Options were valued upon issuance, and re-valued at each financial statement reporting date, utilizing the Black-Scholes valuation model; they were also valued at December 27, 2012, at which time the Company changed its method of accounting for these instruments from the derivative method to the equity method.  The fair value of the Company’s options at December 27, 2012 was $411,792.  This amount was reclassified to equity at December 27, 2012.
 
 
The following table illustrates certain key information regarding our options and option assumptions at December 31, 2012 and 2011.

   
December 31,
 
   
2012
   
2011
 
Number of options outstanding (post-reverse split)
   
2,070,000
     
970,000
 
Value at December 31
 
$
N/A
   
$
162,183
 
Number of options issued during the year (post-reverse split)
   
1,100,000
     
-
 
Value of options issued during the year (post-reverse split)
 
$
-
     
-
 
Number of options recognized during the year  pursuant to SFAS 123(R)
   
1,100,000
     
-
 
Value of options recognized during the year  pursuant to SFAS 123(R)
 
$
186,299
   
$
-
 
Revaluation (gain) during the period
 
$
63,309
   
$
174,835
 
                 
Black-Scholes model variables:
               
Volatility
 
112.43% to 214.36%
   
92.52% to 114.3%
 
Dividends
   
0
     
0
 
Risk-free interest rates
   
0.11% - 1.18
%
   
0.06 to 0.17
%
Term (years)
   
0.26 - 5.00
     
0.15-5.00
 
 
Doubtful Accounts Receivable

The Company maintained an allowance in the amount of $5,547 for doubtful accounts receivable at December 31, 2012, and $11,044 at December 31, 2011. Actual losses on accounts receivable were $5,687  for 2012 and $13,841 for 2011. 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 have historically varied  due to the market price of the Company’s stock at the date of valuation. Generally, these liabilities  increased as the price of the Company’s stock increased (with resultant gain), and decreased as the Company’s stock decreased (yielding a loss). In December 2013, the Company removed  these liabilities from its balance sheet  by  reclassifying them as equity; we expect the amount of future gains and losses recognized to 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  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 nationwide distribution of specialty  food , artisanal food,  organic foods and health food distribution and sales using third-party shippers and through our own delivery vehicles  in the greater Chicago area. 

On May 18, 2012, the Company executed a Stock Purchase Agreement to acquire all of the issued and outstanding shares of Artisan Specialty Foods, Inc., an Illinois corporation (“Artisan”), from its owner, Mr. David Vohaska.  The purchase price was $1.2 million, with up an additional  $300,000 (with a fair value of $131,000) payable in the event certain financial milestones are met over the next one or two years.  The purchase price was primarily financed via a loan from Alpha Capital in the principal amount of $1,200,000.  Prior to the acquisition, Artisan was a supplier and had sold products to the Company.

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, 2012 and 2011.

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, 2012 Compared to Year Ended December 31, 2011
 
Revenue
 
Revenue increased by $7,057,674 or approximately 61% to $18,610,487 for the year ended December 31, 2012 from $11,552,813 in the prior year.  $3,406,391 or 29.5% of the increase was attributable to the acquisition of Artisan. The increase was also attributable to a significant increase in sales of specialty items, and smaller increases in meat and game and cheese products, partially offset by decreases in seafood and poultry 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 goods sold
 
Our cost of goods sold for the year ended December 31, 2012 was $13,793,550, an increase of $4,919,550  or approximately 55% compared to cost of goods sold of $8,874,000 for the year ended December 31, 2011. Cost of goods sold is primarily made up of the following expenses for the year ended December 31, 2012: cost of goods of specialty, meat, game, cheese poultry and other sales categories in the amount of $10,013,013; and shipping expenses in the amount of $3,095,046.   The cost of goods sold increase is mainly associated with the increase in sales, largely due to the Artisan acquisition.    Total  gross margin improved to 25.9% of sales in 2012, compared to 23.2% of sales in 2011.
 
 
In 2012, 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 both increasing sales and increasing market share.  We currently expect, if market conditions and our product revenue mix remain constant, that our cost of goods sold will either remain stable or  likely improve slightly.  
 
Selling, general, and administrative expenses

Selling, general, and administrative expenses increased by $2,222,860  or approximately 110.7% to $4,230,227  during the year ended December 31, 2012 compared to $2,007,367  for the year ended December 31, 2011. Selling, general and administrative expenses were primarily made up of the following for the year ended December 31, 2012: payroll and related expenses, including employee benefits, in the amount of $2,745,160 (including share based compensation in the amount of $161,821, and value of options in the amount of $249,609); consulting and professional fees in the amount of $397,916; facilities and related expenses in the amount of $203,903; insurance costs in the amount of $163,761; office expense in the amount of $152,141; amortization and depreciation expense in the amount of $126,855; travel and entertainment expenses in the amount of $102,590; computer support expenses in the amount of $95,622; commissions expense in the amount of $68,413; advertising expense in the amount of $52,987; vehicle expense in the amount $45,059; credit card fees in the amount of $35,532;  property taxes in the amount of $10,852; and settlement costs of $7,302. The increase in selling, general, and administrative expenses was primarily due to increases in volume, and the acquisition of Artisan Specialty Foods which has higher selling general and administrative expenses than other Innovative Food Holdings historical levels.  In addition, expenses associated with the Company’s annual meeting and the Artisan acquisition had the effect of increasing selling general and administrative expenses. .  We expect our selling, general, and administrative expenses to remain steady or slightly decrease  in 2013.

Interest expense, net
 
Interest expense, net of interest income, increased by $495,336 or approximately 88% to $1,057,308 during the twelve months ended December 31, 2012, compared to $561,972 during the twelve months ended December 31, 2011.  The primary reason for the increase was due to the write-off of the discount on notes payable in the amount of $824,286 related to the extinguishment of debt during the year ended December 31, 2012, and to the note payable in the gross amount of $1,200,000 related to the acquisition of Artisan that the Company entered into in May 2012.
  
Gain on extinguishment of debt

Gain on extinguishment of debt was $3,797,001 during the year ended December 31, 2012, an increase of $3,631,675 or approximately 2,197% compared to gain on extinguishment of debt of $165,326 during the year ended December 31, 2011.  The increase is due to gain realized with the restructure of certain of the Company’s convertible note agreements in 2012. 
 
Loss on Settlement of Debt

Loss on settlement of debt was $63,000 during the year ended December 31, 2011 compared to  $0 during the year ended December 31, 2012.  In 2011, the Company entered into an agreement (the “Morren Settlement Agreement”) with an investor.  Pursuant to the settlement terms of the Morren Settlement Agreement, the Company issued 180,000 shares (post reverse-split) of common stock in full satisfaction of this claim of liability. The fair value of these shares in the amount of $63,000 was recorded as a loss on the settlement of debt during the year ended December 31, 2011.

Cost of Warrant Extension

During the twelve months ended December 31, 2012, the Company extended the term of certain of its warrants outstanding.  The Company valued the cost of the extended term using the Black-Scholes valuation model, and charged the fair value of $842,100 to operations during the year ended December 31, 2012.  There was no comparable charge during the year ended December 31, 2011.

Gain from change in fair value of warrant liability
 
At December 31, 2012, the Company had outstanding warrants to purchase an aggregate of 2,070,000 shares (post reverse-split) of the Company’s common stock.  On December 27, 2012, the Company entered into the 2012 Notes Payable Extension Agreement, which affected the terms of certain of its convertible notes payable.  Under accounting guidance provided by FASB ASC 815-40-05, this resulted in a change in accounting method for the Company’s warrants from derivative accounting to equity accounting. The Company revalued these instruments at December 27, 2012 using the Black-Scholes valuation method. This revaluation resulted in a loss of $172,595, which the Company included in operations during the year ended December 31, 2012. This was an increase of $855,135 or approximately 125.3% compared to a gain of $682,350 from the revaluation of the warrant liability which the Company recorded during the year ended December 31, 2011.
 
 
(Gain) loss from change in fair value of conversion option liability
 
At December 31, 2012, the Company had outstanding note payable conversion options  to purchase an aggregate of 5,368,195 shares (post reverse-split) of the Company’s common stock.  On December 27, 2012, the Company entered into the 2012 Notes Payable Extension Agreement which affected the terms of certain of its convertible notes payable.  Under accounting guidance provided by FASB ASC 815-40-05, this resulted in a change in accounting method for the Company’s warrants from derivative accounting to equity accounting. The Company revalued these instruments at December 27, 2012 using the Black-Scholes valuation method. This revaluation resulted in a loss of $281,024, which the Company included in operations during the year ended December 31, 2012. This was an increase of $876,991 or approximately 147.2% compared to a gain of $595,967 from the revaluation of the warrant liability which the Company recorded during the year ended December 31, 2011.
 
Net (loss) Income
 
For the reasons above, the Company had a net income for the year ended December 31, 2012 of $2,030,494, an increase of $540,377  or approximately 36.3% compared to a net income of $1,490,117 during the twelve months ended December 31, 2011. In 2012 operating income improved due to increases in sales, improved  gross margins, and one-time gains associated with the restructuring of the Company’s convertible notes.
 
Liquidity and Capital Resources at December 31, 2012
 
As of December 31, 2012, the Company had current assets of $2,838,218 consisting of cash of $1,347,029, trade accounts receivable of $959,805, inventory of $517,631, and other current assets of  $13,753.   Also at December 31, 2012, the Company had current liabilities of $1,929,631, consisting of accounts payable and accrued liabilities of $1,719,652 (of which $342,880 is payable to related parties); accrued interest, related parties of $39,866; current portion of notes payable, net of discounts, of $11,543; current portion of notes payable – related parties, net of discounts of $110,500; and a contingent purchase price liability of $48,070.
 
During the twelve months ended December 31, 2012, the Company generated cash from operating activities of $806,874.  This consisted of the Company’s net income of $2,030,494, reduced by the gain on the extinguishment of debt of $3,797,001, and increased by non-cash charges for the value of the extension of warrant terms of $842,100; amortization of discount on notes payable of $838,339; the value of options issued to officers and directors of $348,120; the change in fair value of conversion option liability of $281,024; the change in fair value of warrant liability of $172,785; depreciation and amortization of $126,855;  amortization of discount on convertible accrued interest of $87,520 ; interest capitalized on note payable of $13,551; and value of shares issued in settlement of $7,302.  The Company’s cash position was also reduced by $335,029 as a result of a change in the components of current assets and current liabilities.  The acquisition of Artisan had an effect on the components of the Company’s working capital.  The following amounts were associated with Artisan at December 31, 2012: cash of $275,305; accounts receivable of $427,801; inventory of $527,366; other current assets of $8,333; accounts payable and accrued liabilities of $383,618; and current portion of lease payable of $11,543. 
 
The Company had cash used by investing activities of $1,217,353 in 2012, which consisted of a cash payment to acquire Artisan Specialty Foods in the amount of $1,176,605, and cash paid for the acquisition of property and equipment of $40,748.

The Company had cash provided by financing activities of $895,044 in 2012, which consisted of net proceeds from the issuance of notes payable in the amount of $1,080,000, offset by principal payments on notes payable of $164,956 and principal payments on notes payable to a related party of $20,000.
 
The Company’s had net working capital of $908,587 as of December 31, 2012.  We have generated positive cash flow from operations during the years ended December 31, 2012 and 2011. In addition, the Company’s auditors removed the going concern qualification to the audit opinion on the Company’s financial statements for the year ended December 31, 2012.   The Company  intends to continue to focus on increasing market share and cash flow from operations by focusing its sales activities on specific market segments and new product lines.  Currently, we do not have any material long-term obligations other than those described in Note  9 to the financial statements included in this report. As we seek to increase our sales of perishables, as well as identify new and other consumer and food service oriented products and services, we may use existing cash reserves, long-term financing, or other means to finance such diversification.

If the Company’s 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. The Company expects that any sale of additional equity securities or convertible debt will result in additional dilution to our stockholders.

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.
 
 
The independent auditors’ reports on our December 31, 2011  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.

2013 Plans

During 2013, in addition to our efforts to increase sales in our existing foodservice operations we  plan to attempt 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.
 
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 76.0% and  93% of total sales in the years ended December 31, 2012 and 2011, respectively.  A contract with USF was set to expire  December 31, 2012 but was automatically extended for an additional 12 months..  No other customer accounted for more than 1% of our net revenue.
 
We continue to conduct business with USF.
 
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, 2012 and the related consolidated statements of operations, stockholders' equity (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 audits.

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, 2012 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.

/s/ LIGGETT, VOGT & WEBB, P.A.


New York, NY
March 28, 2013


 
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, 2011 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 audits.
 
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 provides 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, 2011  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.
 
/s/ RBSM LLP
 
New York, NY
March 26, 2012

 
 
Innovative Food Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
 
   
December 31,
   
December 31,
 
   
2012
   
2011
 
ASSETS
           
Current assets
           
    Cash and cash equivalents
 
$
1,347,029
   
$
862,464
 
    Accounts receivable net
   
959,805
     
493,700
 
    Inventory
   
517,631
     
42,312
 
    Other current assets
   
13,753
     
5,420
 
      Total current assets
   
2,838,218
     
1,403,896
 
                 
Property and equipment, net
   
145,632
     
18,222
 
Trade name
   
217,000
     
-
 
Non-compete
   
213,500
     
-
 
Customer relationships
   
489,822
     
-
 
Implied goodwill
   
151,000
     
-
 
Total assets
 
$
4,055,172
   
$
1,422,118
 
                 
LIABILITIES AND  STOCKHOLDERS' EQUITY (DEFICIENCY)
               
Current liabilities
               
     Accounts payable and accrued liabilities
 
$
1,376,772
   
$
925,790
 
     Accrued liabilities - related parties
   
342,880
     
157,080
 
     Accrued interest, net
   
-
     
663,691
 
     Accrued interest - related parties, net
   
39,866
     
29,396
 
     Notes payable, current portion, net of discount of $1,393,411 and $0 as of December 31,
      2012 and 2011, respectively
   
11,543
     
978,982
 
     Notes payable - related parties, current portion
   
110,500
     
130,500
 
     Warrant liability
   
-
     
500,825
 
     Options liability
   
-
     
161,884
 
     Conversion option liability
   
-
     
1,245,761
 
     Contingent purchase price liability
   
48,070
     
-
 
          Total current liabilities
   
1,929,631
     
4,793,909
 
                 
   Accrued interest, long-term portion
   
719,187
     
-
 
     Note payable - long term portion, net of discount of $475,071 and $0 as of December 31, 2012 and 2011, respectively
   
185,068
     
-
 
Total liabilities
   
2,833,886
     
4,793,909
 
                 
Stockholders' equity (deficiency)
               
Common stock, $0.0001 par value; 500,000,000 shares authorized; 6,023,801 and 5,873,843 shares issued (post reverse-split) and 5,809,088 and 5,659,130 shares outstanding (post reverse-split) at December 31, 2012 and 2011, respectively
   
602
     
587
 
   Additional paid-in capital
   
6,329,553
     
3,774,287
 
   Common stock subscribed
   
68,336
     
61,034
 
   Treasury stock, 304 and 304 shares outstanding (post reverse-split)
   
(99
)
   
(99
)
   Accumulated deficit
   
(5,177,106
)
   
(7,207,600
)
      Total stockholders' equity (deficiency)
   
1,221,286
     
(3,371,791
)
               
 
Total liabilities and stockholders' equity (deficiency)
 
$
4,055,172
   
$
1,422,118
 
 
See notes to consolidated financial statements.
 
 
Innovative Food Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
  
   
For the
   
For the
 
   
Year Ended
   
Year Ended
 
   
December 31,
   
December 31,
 
   
2012
   
2011
 
             
             
Revenue
 
$
18,610,487
   
$
11,552,813
 
Cost of goods sold
   
13,793,550
     
8,874,000
 
     
4,816,937
     
2,678,813
 
                 
Selling, general and administrative expenses
   
4,230,227
     
2,007,367
 
      Total operating expenses
   
4,230,227
     
2,007,367
 
                 
Operating income
   
586,710
     
671,446
 
                 
Other (income) expense:
               
   Interest expense
   
1,057,308
     
561,972
 
   (Gain) from the extinguishment of debt
   
(3,797,001
)
   
(165,326
)
   Loss on settlement of debt
   
-
     
63,000
 
  Cost of warrant extension
   
842,100
     
-
 
  Loss (gain) from change in fair value of warrant liability
   
172,785
     
(682,350
)
  Loss (gain) from change in fair value of conversion option liability
   
281,024
     
(595,967
)
      Total other (income) expense
   
(1,443,784
)
   
(818,671
)
                 
 Income before income taxes
   
2,030,494
     
1,490,117
 
                 
  Income tax expense
   
-
     
-
 
                 
Net income
 
$
2,030,494
   
$
1,490,117
 
                 
Net income per share - basic (post reverse-split)
 
$
0.36
   
$
0.34
 
                 
Net income per share - diluted (post reverse-split)
 
$
0.25
   
$
0.03
 
                 
Weighted average shares outstanding - basic (post reverse-split)
   
5,698,434
     
4,382,459
 
                 
Weighted average shares outstanding - diluted (post reverse-split)
   
12,530,222
     
13,110,770
 
 
See notes to consolidated financial statements.
 
 
Innovative Food Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

   
For the
   
For the
 
   
Year Ended
   
Year Ended
 
   
December 31,
   
December 31,
 
   
2012
   
2011
 
             
Cash flows from operating activities:
           
   Net income
 
$
2,030,494
   
$
1,490,117
 
  Adjustments to reconcile net income to net cash provided by operating activities:
               
   Depreciation and amortization
   
126,855
     
14,034
 
   Amortization of discount on notes payable
   
838,339
     
292,545
 
   Amortization of discount on accrued interest
   
87,520
     
148,399
 
   Interest capitalized to note payable
   
13,551
     
-
 
   Loss on settlement
   
-
     
63,000
 
   Value of shares issued in settlement of claim
   
7,302
     
-
 
   Value of options issued to officer and directors
   
348,120
     
-
 
   Value of extension of term of warrants
   
842,100
     
-
 
   Gain on the extinguishment of debt and accrued interest
   
(3,797,001
)
   
(165,326
)
   Allowance for bad debt
   
-
     
147,594
 
   Change in fair value of warrant liability
   
172,785
     
(682,350
)
   Change in fair value of option liability
   
63,609
     
(174,835
)
   Change in fair value of conversion option liability
   
281,024
     
(595,967
)
  Changes in assets and liabilities:
               
        Accounts receivable, net
   
(3,864
)
   
(77,185
)
        Inventory and other current assets, net
   
(188,967
)
   
10,345
 
        Accounts payable and accrued expenses - related party
   
134,670
     
(6,769
)
        Accounts payable and accrued expenses
   
(149,663
)
   
130,962
 
   Net cash  provided by operating activities
   
806,874
     
594,564
 
                 
Cash flows from investing activities:
               
   Payment to acquire Artisan Specialty Foods, net
   
(1,176,605
)
   
-
 
   Proceeds received on loan
   
-
     
1,500
 
   Purchase of treasury stock
   
-
     
(99
)
   Acquisition of property and equipment
   
(40,748
)
   
(8,468
)
   Net cash used in investing activities
   
(1,217,353
)
   
(7,067
)
                 
Cash flows from financing activities:
               
    Proceeds from issuance of notes payable
   
1,080,000
     
-
 
    Principal payments on debt
   
(164,956
)
   
(243,115
)
    Principal payments on notes payable - related parties
   
(20,000
)
   
-
 
   Net cash (used in) provided by  financing activities
   
895,044
     
(243,115
)
                 
Increase in cash and cash equivalents
   
484,565
     
344,382
 
                 
Cash and cash equivalents at beginning of period
   
862,464
     
518,082
 
                 
Cash and cash equivalents at end of period
 
$
1,347,029
   
$
862,464
 
                 
Supplemental disclosure of cash flow information:
               
                 
Cash paid during the period for:
               
Interest
 
$
35,327
   
$
31,304
 
                 
Taxes
 
$
-
   
$
-
 
                 
Conversion of notes payable and accrued interest to common stock
 
$
-
   
$
318,634
 
                 
Commitment to issue shares charged to common stock subscribed
 
$
7,302
   
$
-
 
Common stock and options issued in connection with the Haley acquisition
 
$
62,145
   
$
-
 
 
See notes to consolidated financial statements.
 
 
Innovative Food Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
For the two years ended December 31, 2012
 
   
Common Stock
         
Common stock
   
Treasury stock
   
Accumulated
       
   
Amount
   
Value
   
APIC
   
Subscribed
   
Amount
   
Value
   
Deficit
   
Total
 
                                                                 
Balance as of December 31, 2010
   
4,327,702
     
433
     
2,605,352
      -       -       -      
(8,697,717
)    
(6,091,932
)
                                                                 
Shares repurchased and held in treasury
    -       -       -       -       304       (99 )     -      
(99
)
                                                                 
Shares issued to directors for services
   
72,182
     
7
     
21,993
      -       -       -       -      
22,000
 
                                                                 
Shares issued for settlement of convertible note payable
   
180,000
     
18
     
62,982
     
-
     
-
     
-
     
-
     
63,000
 
                                                                 
Common stock issued for conversion of notes payable and accrued interest
   
1,359,551
     
136
     
349,794
     
61,034
     
-
     
-
     
-
     
410,964
 
                                                                 
Common stock issued in error
   
14,409
     
1
     
(1
)
   
-
     
-
     
-
     
-
     
-
 
                                                                 
Cancellation of shares of common stock issued in error
   
(80,000
)
   
(8
)
   
8
     
-
     
-
     
-
     
-
     
-
 
                                                                 
Discount to notes payable due to beneficial conversion feature  of accrued interest
   
-
     
-
     
110,322
     
-
     
-
     
-
     
-
     
110,322
 
                                                                 
Reclassification of notes payable  conversion option liability to equity
   
-
     
-
     
623,837
     
-
     
-
     
-
     
-
     
623,837
 
                                                                 
Income for the year ended December 31, 2011
   
-
     
-
     
-
     
-
     
-
     
-
     
1,490,117
     
1,490,117
 
                                                                 
Balance as of December 31, 2011
   
5,873,844
     
587
     
3,774,287
     
61,034
     
304
     
(99
)
   
(7,207,600
)
   
(3,371,791
)
                                                                 
Shares issued for settlement of claim
   
-
     
-
     
-
     
7,302
     
-
     
-
     
-
     
7,302
 
                                                                 
Shares related to Haley acquisition
   
150,000
     
15
     
37,485
     
-
     
-
     
-
     
-
     
37,500
 
                                                                 
Stock options related to Haley acquisition
   
-
     
-
     
24,645
     
-
     
-
     
-
     
-
     
24,645
 
                                                                 
Stock options issued to directors for services
   
-
     
-
     
161,821
     
-
     
-
     
-
     
-
     
161,821
 
                                                                 
Discount on notes payable
   
-
     
-
     
1,750,226
     
-
     
-
     
-
     
-
     
1,750,226
 
                                                                 
Rounding due to reverse  stock split
   
(42
)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
                                                                 
Discount to notes payable due to beneficial conversion feature of accrued interest
   
-
     
-
     
87,376
     
-
     
-
     
-
     
-
     
87,376
 
                                                                 
Reclassification of notes payable  conversion option liability to equity
   
-
     
-
     
81,921
     
-
     
-
     
-
     
-
     
81,921
 
                                                                 
Reclassification of value of stock options from liability to equity
   
-
     
-
     
411,792
     
-
     
-
     
-
     
-
     
411,792
 
                                                                 
Income for the year ended December 31, 2012
   
-
     
-
     
-
     
-
     
-
     
-
     
2,030,494
     
2,030,494
 
                                                                 
Balance as of December 31, 2012
   
6,023,802
     
602
     
6,329,553
     
68,336
     
304
     
(99
)
   
(5,177,106
)
   
1,221,286
 

See notes to consolidated financial statements.
 
 
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Business Activity
 
FII is in the business of providing premium foodservice establishments, including white tablecloth restaurants with the freshest origin-specific perishables and specialty food products direct from its network of vendors to the end users (restaurants, hotels, country clubs, national chain accounts, casinos, and catering houses) within 24 - 72 hours. For The Gourmet Inc., through its website www.forthegourmet.com, and through additional sales channels, provides the highest quality gourmet food products to the retail consumer market under the For The Gourmet line.  
 
We currently sell the majority of our products through a distributor relationship between FII and Next Day Gourmet, L.P., a subsidiary of U.S. Foods (“USF”), a $20 Billion broad line distributor.  On May 18, 2012, the Company executed a Stock Purchase Agreement to acquire all of the issued and outstanding shares of Artisan Specialty Foods, Inc., an Illinois corporation (“Artisan”), Artisan was previously a supplier to the Company. Artisan  is a supplier of over 1,500 niche gourmet products to over 500 customers in the Greater Chicago area.

Use of Estimates
 
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, we 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, from August 25, 2005 through December 27, 2012, we accounted 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 were valued at issuance utilizing the Black-Scholes valuation method, and were re-valued at each period ending date, also using the Black-Scholes valuation method.  Any gain or loss from revaluation was charged to operations during the period.  On December 27, 2012, we entered into agreements (the “2012 Notes Payable Extension Agreement”) with certain holders of its convertible notes which, among other things, created a minimum conversion price for the principal amount of the notes of $0.05. Under accounting guidance provided by FASB ASC 815-40-05, this resulted in a change in accounting method for our derivative financial instruments to the equity method of accounting.
 
Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Innovative Food Holdings, Inc., and its wholly owned operating subsidiaries, Artisan Specialty Foods, Inc. (“Artisan”), Food Innovations, Inc. (“FII”), Food New Media Group, Inc. (“FNM”), Gourmet Foodservice Group, Inc. (“GFG”),  and 4 The Gourmet, Inc (d/b/a For The Gourmet, Inc.) (“Gourmet”) (collectively, the “Company, or “IVFH”). 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.
 
 
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
 
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.
  
Cost of goods sold
 
We have included in cost of goods sold all costs which are directly related to the generation of revenue. These costs include primarily the cost of the product plus the shipping costs.
 
Selling, general, and administrative expenses
 
We have included in selling, general, and administrative expenses all other costs which support the Company’s operations but which are not includable as a cost of sales. These include primarily payroll, facility costs such as rent and utilities, selling expenses such as commissions and advertising, and other administrative costs including professional fees and costs associated with non-cash stock compensation.  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 $5,547 and $11,044 at December 31, 2012, and 2011, 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
Warehouse Equipment
5 years
Office Furniture and Fixtures
5 years
Vehicles
5 years
 
 
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
 
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.
 
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, 2012, 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.
 
 
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
 
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. 
 
Diluted earnings per share was computed as follows for the year ended December 31, 2012:

   
Income (Numerator)
   
Shares (Denominator)(post reverse-split)
   
Per-Share Amount (post reverse-split)
 
Basic earnings per share (post reverse-split)
 
$
2,030,494
     
5,698,434
   
$
0.36
 
Effect of Dilutive Securities
                       
Conversion of notes and interest into common stock:
                       
  Additional shares
           
4,293,924
         
  Decrease in interest expense due to conversion
   
130,007
                 
  Remove loss on revaluation of conversion option liability
   
281,026
                 
Exercise of in-the-money warrants:
                       
  Additional shares (post reverse-split)
           
2,194,000
         
  Remove loss on revaluation of warrant liability
   
663,238
                 
Shares accrued, not yet issued (post reverse-split)
           
343,864
         
                         
Diluted earnings per share (post reverse-split)
 
$
3,104,765
     
12,530,222
   
$
0.25
 

Anti-dilutive shares at December 31, 2012:

For the year ended December 31, 2012, the Company excluded certain dilutive securities form the calculation of dilutive earnings per share because the effect would be anti-dilutive, including warrants to purchase 1,870,0000 shares (post reverse-split) at exercise prices of $0.55 to $0.60 per share (post reverse-split); 2,070,000 shares (post reverse-split) issuable upon the exercise of options at $0.35 to $0.40 (post reverse-split), and 1,531,256 shares (post reverse-split) issuable upon the conversion of notes and accrued interest at $1.00 per share  (post reverse-split). 

Diluted earnings per share was computed as follows for the year ended December 31, 2011:

   
Income (Numerator)
   
Shares (Denominator)
   
Per-Share Amount
 
Basic earnings per share (post reverse-split)
 
$
1,490,117
     
4,382,459
   
$
0.34
 
Effect of Dilutive Securities
                       
Conversion of notes and interest into common stock:
                       
  Additional shares (post reverse-split)
           
8,384,447
         
  Decrease in interest expense due to conversion
   
693,087
                 
  Remove gain on revaluation of conversion option liability
   
(1,768,724
)
               
                         
Shares accrued, not yet issued (post reverse-split)
           
343,864
         
                         
Diluted earnings per share (post reverse-split)
 
$
414,480
     
13,110,770
   
$
0.03
 
 
 
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
 
Anti-dilutive shares at December 31, 2011:

For the year ended December 31, 2011, the Company excluded warrants to purchase 1,870,000 (post reverse-split) 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 970,000 shares (post reverse-split) issuable upon the exercise of options at $0.38-$0.48  per share (post reverse-split). 
                                                                                                                         
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, 2012 and 2011, trade receivables from the Company’s largest customer amount to 60% and 93%, 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.
 
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 were valued via the Black-Scholes valuation method when issued, and re-valued at each reporting period.  The gain or loss from this revaluation was charged to compensation expense during the period.  On December 27, 2012, the Company  entered into the 2012 Notes Payable Extension Agreement with certain holders of its convertible notes which, among other things, created a minimum conversion price for the principal amount of the notes. Under accounting guidance provided by FASB ASC 815-40-05, this resulted in a change in accounting method for  our derivative financial instruments to the equity method of accounting. We revalued our derivative liabilities at December 27, 2012, and charged the gain or loss from this revaluation to compensation expense during the period.
 
Options expense and gain or loss on revaluation during the twelve months ended December 31, 2012 and 2011 are summarized in the table below:

 
December 31,
 
 
2012
 
2011
 
         
Option expense
 
$
348,120
   
$
-
 
                 
(Gain) loss on revaluation of options
 
$
63,311
   
$
(174,834
 
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 consolidated financial statements.
 
 
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
 
2.  ACQUISITIONS

Artisan Specialty Foods, Inc.

On May 18, 2012, the Company executed a Stock Purchase Agreement to acquire all of the issued and outstanding shares of Artisan Specialty Foods, Inc., an Illinois corporation (“Artisan”), from its owner, Mr. David Vohaska.  The purchase price was $1.2 million, with up to another $300,000  (with a fair value of $131,000 ) payable in the event certain financial milestones are met over the next one or two years.  The purchase price was primarily financed via a loan from Alpha Capital Aktiengesselschaft (see note 10) in the principal amount of $1,200,000.  Prior to the acquisition, Artisan was a supplier and had sold products to the Company.
  
The total purchase price was allocated to Artisan’s net tangible assets, with the residual allocated to intangible assets:
 
Closing cash payment
 
$
1,200,000
 
Contingent purchase price
   
131,000
 
Total purchase price
 
$
1,331,000
 
         
Tangible assets acquired
 
$
918,515
 
Liabilities assumed
   
(614,515
)*
Net tangible assets
   
304,000
 
Trade name
   
217,000
 
Non-compete agreement
   
244,000
 
Customer relationships
   
415,000
 
Goodwill
   
151,000
 
Total purchase price
 
$
1,331,000
 
 
* excluding the Line of Credit paid off with closing cash payment

Pro forma results

The following tables set forth the unaudited pro forma results of the Company as if the acquisition of Artisan  had taken place on the first day of the periods presented. These combined results are not necessarily indicative of the results that may have been achieved had the companies always been combined.
  
   
For the Year Ended December 31,
 
   
2012
   
2011
 
Total revenues
 
$
20,284,899
   
$
15,189,207
 
Net income
   
2,219,314
     
1,788,593
 
Basic net income (loss) per common share (post reverse-split)
 
$
0.389
   
$
0.410
 
Diluted net income (loss) per common share (post reverse-split)
 
$
0.208
   
$
0.120
 
Weighted average shares – basic (post reverse-split)
   
5,698,434
     
4,382,459
 
Weighted average shares – diluted (post reverse-split)
   
10,650,222
     
15,050,011
 
 
 
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

The Haley Group

The Haley Group, LLC is a food manufacture representative that manages the vendor relationships at a food distributor’s corporate level. The Haley Group also provides their suppliers with guidance and assistance as needed at the distributor’s regional and divisional level. The Haley Group provides these services in exchange for a combination of monthly retainers and percentages of future sales of client products.  On November 2, 2012, the Company entered into an asset purchase agreement (the “Haley Acquisition Agreement”) with Haley Group, LLC whereby the Company acquired all existing contracts between Haley Group and its customers for the following consideration:  300,000 shares (post reverse-split) of the Company’s common stock; 150,000 shares (post reverse-split) of which vest immediately and 150,000 shares (post reverse-split) of which vest in one year under certain conditions;  options to purchase 100,000 shares (post reverse-split) of the Company’s common stock at a price of $0.44 per share (post reverse-split); and $20,000 cash contingent upon the attainment of future revenue milestones. The Haley Acquisition was valued at a total cost of $119,645.  This intangible fair value of the purchase amount was allocated to Haley Group’s customer relationships and capitalized accordingly on the Company’s balance sheet at December 31, 2012 and is being amortized over 3 years.
 
3. ACCOUNTS RECEIVABLE
 
At December 31, 2012 and 2011, accounts receivable consists of:
 
   
2012
   
2011
 
Accounts receivable from customers
 
$
965,352
   
$
504,744
 
Allowance for doubtful accounts
   
(5,547
)
   
(11,044
)
Accounts receivable, net
 
$
959,805
   
$
493,700
 
 
4.   INVENTORY
 
Inventory consists of specialty products which are warehoused in Naples, Florida and Lyons, Illinois, and  other products held by Company’s vendors. At December 31, 2012 and 2011, finished goods inventory is as follows:

   
2012
   
2011
 
Finished goods inventory
 
$
517,631
   
$
42,312
 
  
5. PROPERTY AND EQUIPMENT
 
A summary of property and equipment at December 31, 2012 and 2011 is as follows:
 
   
2012
   
2011
 
Computer Equipment
 
$
382,300
   
$
321,716
 
Warehouse Equipment
   
7,733
     
-
 
Furniture and Fixtures
   
152,236
     
74,850
 
Vehicles
   
33,239
     
-
 
     
575,508
     
396,566
 
Less accumulated depreciation and amortization
   
(429,876
)
   
(378,344
)
Total
 
$
145,632
   
$
18,222
 
 
Depreciation and amortization expense for property and equipment amounted to $51,532 and $14,034 for the year ended December 31, 2012 and 2011, respectively.
 
 
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

6.  INTANGIBLE ASSETS

The Company acquired certain  intangible assets pursuant to the acquisition of Artisan Specialty Foods and  the acquisition of certain assets of The Haley Group (see note 2). The following is the net book value of these assets:
 
   
December 31, 2012
 
         
Accumulated
       
   
Gross
   
Amortization
   
Net
 
                   
Trade Name
 
$
217,000
   
$
-
   
$
217,000
 
Non-Compete Agreement
   
244,000
     
(30,500
)
   
213,500
 
Customer Relationships
   
534,645
     
(44,823
)
   
489,822
 
Goodwill
   
151,000
     
-
     
151,000
 
   
$
1,146,645
   
$
(75,323
)
 
$
1,071,322
 

Total amortization expense charged to operations for the year ended December 31, 2012 and 2011 was $73,323 and $0, respectively.

Amortization of finite life  intangible assets as of December 31, 2012 is as follows:

2013
  $ 183,882  
2014
    183,882  
2015
    180,558  
2016
    113,500  
2017 and thereafter
    41,500  
Total