UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
  
 
FORM 10-Q
 
 
x  Quarterly report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
For the quarterly period ended September 30, 2014March 31, 2015

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

Commission File Number: 0-9376

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

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

28411 Race Track Rd.
Bonita Springs, Florida 34135
(Address of Principal Executive Offices)

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

 (Former name, former address and former fiscal year, if changed since last report)

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 o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
(Check One):
Large Accelerated filer o
Accelerated filer                   o
Non-accelerated filer    o
(Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Regulation 12b-2 of the Exchange Act):   YES o  NO x
 
State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date 20,673,326date: 23,173,447 shares of common stock issued and 22,472,784 shares of common stock outstanding and 21,373,989 shares issued as of November 16, 2014. May 6, 2015.
 
 
 
 
ININNOVATIVE NOVATIVE FOOD HOLDINGS, INC.
TABLE OF CONTENTS TO FORM 10-Q

  Page
PART I.FINANCIAL INFORMATION 
   
Item 1.
Condensed Consolidated Financial Statements (unaudited)
3
 
Condensed Consolidated Balance Sheets
3
 
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
4
 
Condensed Consolidated Statements of Cash Flows
5
 
Notes to the Condensed Consolidated Financial Statements
6
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations (including cautionary statement)
2122
Item 4.
Controls and Procedures
2728
   
PART II.OTHER INFORMATION 
   
Item 1.
Legal Proceedings
2829
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
2829
Item 3.
Defaults Upon Senior Securities
2829
Item 4.
Mine Safety Disclosures
2829
Item 5.
Other Information
2829
Item 6.
Exhibits
2830
 
Signatures
2931
 
 
 
 
PART I. FINANCIAL INFORMATION
 
ITEITEM M 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Innovative Food Holdings, Inc.
Condensed Consolidated Balance Sheet Sheets

  September 30,  December 31, 
  2014  2013 
ASSETS (unaudited)    
Current assets      
Cash and cash equivalents
 
$
4,079,213
  
$
2,073,605
 
Accounts receivable net
  
1,165,410
   
771,205
 
Inventory
  
1,231,299
   
839,979
 
Other current assets
  
351,024
   
11,316
 
Due from related parties
  
462,626
   
-
 
Total current assets
  
7,289,572
   
3,696,105
 
         
Property and equipment, net
  
1,933,251
   
954,068
 
Investments
  
104,000
   
-
 
Intangible assets, net
  
23,688,611
   
887,442
 
Total assets
 
$
33,015,434
  
$
5,537,615
 
         
LIABILITIES AND EQUITY
        
Current liabilities
        
Accounts payable and accrued liabilities
 
$
4,496,724
  
$
1,285,149
 
Deferred revenue
  
3,961,634
   
-
 
Accrued liabilities - related parties
  
178,150
   
523,110
 
Accrued interest
  
617,038
   
671,481
 
Accrued interest - related parties
  
53,621
   
48,708
 
Revolving credit facilities
  
897,222
   
-
 
Notes payable, current portion, net of discount
  
209,339
   
1,150,253
 
Notes payable - related parties, current portion
  
110,500
   
110,500
 
Contingent liabilities
  
448,750
   
80,881
 
Total current liabilities
  
10,972,978
   
3,870,082
 
         
Note payable - long term portion, net of discount
  
1,883,324
   
727,328
 
Notes payable - related parties, long term portion
  
2,199,970
   
-
 
Total liabilities
  
15,056,272
   
4,597,410
 
         
Equity
        
Common stock, $0.0001 par value; 500,000,000 shares authorized; 21,023,989 and
7,732,456 shares issued and 20,323,326 and 7,117,743 shares outstanding at September 30, 2014
and December 31, 2013, respectively
  
2,102
   
774
 
Additional paid-in capital
  
24,528,736
   
7,702,893
 
Common stock subscribed
  
250,000
   
-
 
Treasury stock, 486,254 and 400,304 shares outstanding at September 30, 2014
and December 31, 2013, respectively
  
(160,099
)
  
(100,099
)
Accumulated deficit
  
(6,701,140
)
  
(6,663,363
)
Total Innovative Food Holdings, Inc.’s stockholders’ equity
  
17,919,599
   
940,205
 
Noncontrolling interest in variable interest entity
  
39,563
   
-
 
      Total equity
  
17,959,162
   
940,205
 
         
Total liabilities and equity
 
$
33,015,434
  
$
5,537,615
 

  March 31,  December 31, 
  2015  2014 
  (unaudited)    
ASSETS      
Current assets      
Cash and cash equivalents
 
$
3,211,491
  
$
3,112,526
 
Accounts receivable net
  
1,304,123
   
1,242,970
 
Inventory
  
1,172,482
   
1,195,327
 
Other current assets
  
804,745
   
625,495
 
Due from related parties
  
461,241
   
461,130
 
Total current assets
  
6,954,082
   
6,637,448
 
         
Property and equipment, net
  
1,855,619
   
1,922,044
 
Investment
  
204,000
   
204,000
 
Intangible assets, net
  
22,045,672
   
23,610,549
 
Total assets
 
$
31,059,373
  
$
32,374,041
 
         
LIABILITIES AND STOCKHOLDERS' EQUITY
        
Current liabilities
        
Accounts payable and accrued liabilities
 
$
4,482,620
  
$
4,096,700
 
Deferred revenue
  
4,777,092
   
4,792,609
 
Accrued liabilities - related parties
  
462,045
   
1,137,692
 
Accrued interest
  
606,602
   
603,034
 
Accrued interest - related parties
  
85,945
   
78,945
 
Revolving credit facilities
  
-
   
360,871
 
Notes payable, current portion, net of discount
  
1,258,560
   
714,811
 
Notes payable - related parties, current portion
  
110,500
   
110,500
 
Deferred tax liability
  
1,069,200
   
1,069,200
 
Contingent liabilities
  
546,250
   
572,500
 
Total current liabilities
  
13,398,814
   
13,536,862
 
         
Note payable - long term portion, net of discount
  
532,561
   
1,251,745
 
Notes payable - related parties, long term portion
  
2,199,970
   
2,199,970
 
Total liabilities
  
16,131,345
   
16,988,577
 
         
Stockholders' equity
        
Common stock, $0.0001 par value; 500,000,000 shares authorized; 23,173,447 and
21,393,989 shares issued, and 22,472,784 and 20,693,326 shares outstanding at
March 31, 2015 and December 31, 2014, respectively
  
2,318
   
2,140
 
Additional paid-in capital
  
27,496,774
   
25,937,734
 
Treasury stock, 486,254 shares outstanding at March 31, 2015 and December 31, 2014
  
(160,099
)
  
(160,099
)
Accumulated deficit
  
(12,410,605
)
  
(10,395,495
)
Total Innovative Food Holdings, Inc. stockholders' equity
  
14,928,388
   
15,384,280
 
Noncontrolling interest in variable interest entity
  
(360
)
  
1,184
 
Total stockholder's equity
  
14,928,028
   
15,385,464
 
         
Total liabilities and stockholders' equity
 
$
31,059,373
  
$
32,374,041
 
See notes to these unaudited condensed consolidated financial statements.
 
 
3

Innovative Innovative Food Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(UNAUDITED)
 
  For the Three  For the Three  For the Nine  For the Nine 
  Months Ended  Months Ended  Months Ended  Months Ended 
  Sept 30,  Sept 30,  Sept 30,  Sept 30, 
  2014  2013  2014  2013 
             
             
Revenue
 
$
8,757,934
  
$
5,840,283
  
$
20,760,427
  
$
16,400,258
 
Cost of goods sold
  
6,577,167
   
4,161,765
   
14,771,298
   
11,660,860
 
Gross margin
  
2,180,767
   
1,678,518
   
5,989,129
   
4,739,398
 
                 
Selling, general and administrative expenses
  
2,673,836
   
1,282,722
   
5,345,053
   
3,691,679
 
Total operating expenses
  
2,673,836
   
1,282,722
   
5,345,053
   
3,691,679
 
                 
Operating income
  
(493,069
)
  
395,796
   
644,076
   
1,047,719
 
                 
Other (income) expense:
                
Other (income)
  
(25,495
)
  
-
   
(45,495
)
  
-
 
Interest expense
  
146,487
   
733,554
   
687,785
   
1,448,111
 
Total other (income) expense
  
120,992
   
733,554
   
642,290
   
1,448,111
 
                 
                 
Net (loss) income before taxes
  
(614,061
)
  
(337,758
)
  
1,786
   
(400,392
)
                 
Income tax expense
  
-
   
-
   
-
   
-
 
                 
Net (loss) income
 
$
(614,061
)
 
$
(337,758
)
 
$
1,786
  
$
(400,392
)
                 
Less net income attributable to noncontrolling interest
in variable interest entities
  
39,563
   
-
   
39,563
   
-
 
                 
Net (loss) attributable to Innovative Food Holdings, Inc.
 
$
(653,624
)
 
$
(337,758
) 
 
$
(37,777
) 
 
$
(400,392
) 
                 
Net (loss) per share - basic
 
$
(0.077
)
 
$
(0.052
)
 
$
(0.005
)  
$
(0.063
)
                 
Net (loss) per share - diluted
 
$
(0.077
)
 
$
(0.052
)
 
$
(0.005
) 
$
(0.063
)
                 
Weighted average shares outstanding - basic
  
9,374,203
   
6,479,385
   
8,249,469
   
6,405,756
 
                 
Weighted average shares outstanding - diluted
  
9,374,203
   
6,479,385
   
8,249,469
   
6,405,756
 

  For the Three  For the Three 
  Months Ended  Months Ended 
  March 31,  March 31, 
  2015  2014 
       
       
Revenue
 
$
11,181,817
  
$
5,553,466
 
Cost of goods sold
  
8,185,305
   
3,729,855
 
Gross margin
  
2,996,512
   
1,823,611
 
         
Selling, general and administrative expenses
  
4,881,396
   
1,368,111
 
Total operating expenses
  
4,881,396
   
1,368,111
 
         
Operating (loss) income
  
(1,884,884
)
  
455,500
 
         
Other (income) expense:
        
Interest expense, net
  
131,770
   
286,794
 
Other (income)
  
-
   
(20,000
) 
Total other (income) expense
  
131,770
   
266,794
 
         
Net (loss) income before taxes
  
(2,016,654
)
  
188,706
 
         
Income tax expense
  
-
   
-
 
         
Net (loss) income
 
$
(2,016,654
)
 
$
188,706
 
         
Less net income attributable to noncontrolling interest
in variable interest entities
  
(1,544
) 
  
-
 
         
Net (loss) income attributable to Innovative Food Holdings, Inc.
 
$
(2,015,110
)
 
$
188,706
 
         
Net (loss) income per share - basic
 
$
(0.099
)
 
$
0.025
 
         
Net (loss) income per share - diluted
 
$
(0.099
)
 
$
0.014
 
         
Weighted average shares outstanding - basic
  
20,447,523
   
7,538,537
 
         
Weighted average shares outstanding - diluted
  
20,447,523
   
13,563,347
 
 See notes to these unaudited condensed consolidated financial statements.

 
4

Innovative Innovative Food Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
 
  For the Nine  For the Nine 
  Months Ended  Months Ended 
  Sept 30,  Sept 30, 
  2014  2013 
       
       
Cash flows from operating activities:      
Net income (loss)
 
$
1,786
  
$
(400,392
)
Gain on disposition of property and equipment
  
(24,495
)
  
-
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
        
Increase in allowance for doubtful accounts
  
25,316
   
93,112
 
Depreciation and amortization
  
503,650
   
196,058
 
Non-cash compensation
  
160,855
   
35,662
 
Amortization of discount on notes payable
  
608,541
   
1,337,934
 
Changes in assets and liabilities:
        
Accounts receivable, net
  
(417,181
)
  
120,463
 
Deferred revenue
  
139,446
 
  
-
 
Inventory and other current assets, net
  
(108,779
)
  
(285,623
)
Accounts payable and accrued expenses - related party
  
(269,212
)
  
(260,987
)
Accounts payable and accrued expenses
  
545,406
   
(8,913
)
Contingent liability
  
(107,131
)
  
-
 
Net cash provided by operating activities
  
1,058,202
   
827,314
 
         
Cash flows from investing activities:
        
         
Investments in companies
  
(104,000
)
  
-
 
Acquisition of Organic Food Brokers
  
(100,000
)
  
-
 
Cash received in acquisition of The Fresh Diet
  
277,885
   
-
 
Cash received from sale of property and equipment
  
51,933
   
-
 
Acquisition of property and equipment
  
(3,519
)
  
(338,140
)
Net cash provided by (used in) investing activities
  
122,299
   
(338,140
)
         
Cash flows from financing activities:
        
Purchase of treasury stock
  
(60,000
)
  
(100,000
)
Common stock sold for cash
  
1,835,000
   
0
 
Net principal payments on notes and capital leases
  
(949,893
)
  
(361,411
)
Net cash provided by (used in)  financing activities
  
825,107
   
(461,411
)
         
Increase in cash and cash equivalents
  
2,005,608
   
27,763
 
         
Cash and cash equivalents at beginning of period
  
2,073,605
   
1,347,029
 
         
Cash and cash equivalents at end of period
 
$
4,079,213
  
$
1,374,792
 
         
Supplemental disclosure of cash flow information:
        
         
Cash paid during the period for:
        
Interest
 
$
44,367
  
$
43,154
 
         
Taxes
 
$
-
  
$
-
 
         
Issuance of 279,310 shares of common stock previously subscribed
 
$
-
  
$
68,336
 
         
Issuance of 341,794 shares of common stock for conversion of notes payable and accrued interest
 
$
-
  
$
85,448
 
         
Mortgage and purchase of land and building
 
$
-
  
$
546,000
 
         
Issuance of 10,000,000 shares of common stock for acquisition of The Fresh Diet
 
$
14,000,000
  
$
-
 
         
Issuance of 846,266 shares of common stock for conversion of notes payable and accrued interest
 
$
211,482
  
$
-
 
         
Discount on notes payable due to extension of term
 
$
732,565
  
$
-
 
         
Acquisition note and options issued for the purchase of Organic Food Brokers
 
$
271,349
  
$
-
 
  For The Three Months Ended  For The Three Months Ended 
  March 31,  March 31, 
  2015  2014 
       
Cash flows from operating activities:      
Net (loss) income
 
$
(2,016,654
)
 
$
188,706
 
         
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
        
       
 
 
Depreciation and amortization
  
295,745
   
67,574
 
Stock based compensation
  
759,603
   
33,588
 
Amortization of discount on notes payable
  
99,157
   
260,035
 
Changes in assets and liabilities:
        
Accounts receivable, net
  
(61,151
)
  
(70,545
)
Deferred revenue
  
(15,517
)
  
-
 
Inventory and other current assets, net
  
(156,405
)
  
(85,213
)
Accounts payable and accrued expenses - related party
  
(218,851
)
  
(296,820
)
Accounts payable and accrued expenses
  
389,485
   
133,701
 
Contingent liability
  
(26,250
)
  
(39,045
)
Net cash (used in) provided by operating activities
  
(950,838
)
  
191,981
 
         
Cash flows from investing activities:
        
         
Investments in food related companies
  
-
   
(54,000
)
Cash paid to re-acquire shares issued in acquisition of The Fresh Diet
  
(3,000,000
)
    - 
Acquisition of property and equipment
  
(18,530
)
  
-
 
Net cash provided by (used in) investing activities
  
(3,018,530
)
  
(54,000
)
         
Cash flows from financing activities:
        
Common stock sold for cash
  
4,288,596
   
-
 
Common stock sold for exercise of options and warrants
  
415,200
   
-
 
Purchase of treasury stock for cash
  
-
   
(60,000
)
Borrowings on revolving credit facilities
  
954,120
   
-
 
Payments made on revolving credit facilities
  
(1,314,991
)
  
-
 
         
Principal payments on debt
  
(215,133
)
  
(183,370
)
Principal payments capital leases
  
(59,459
)
  
-
 
Net cash (used in) financing activities
  
4,068,333
   
(243,370
)
         
Increase (decrease) in cash and cash equivalents
  
98,965
   
(105,389
)
         
Cash and cash equivalents at beginning of period
  
3,112,526
   
2,073,605
 
         
Cash and cash equivalents at end of period
 
$
3,211,491
  
$
1,968,216
 
         
Supplemental disclosure of cash flow information:
        
         
Cash paid during the period for:
        
Interest
 
$
22,045
  
$
15,460
 
         
Taxes
 
$
-
  
$
-
 
 See notes to these unaudited condensed consolidated financial statements.
 
 
5
 
INNOVATIVEINNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014March 31, 2015
(Unaudited)
 
1. BASIS OF PRESENTATION
 
Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements of Innovative Food Holdings, Inc., and its wholly owned subsidiaries, some of which are non-operating, Artisan Specialty Foods, Inc. (“Artisan”), Food Innovations, Inc. (“FII”Food Innovations” or “FII”), Food New Media Group, Inc. (“FNM”), Organic Food Brokers, Inc. (“OFB”), Gourmet FoodserviceFood Service Group, Inc. (“GFG”), Gourmet Foodservice Warehouse, Inc., Gourmeting, Inc.,; The Fresh Diet, Inc., (“The Fresh Diet” or “FD”), The Haley Group, Inc., (“Haley”), and 4 The Gourmet, Inc. (d/b/a For The Gourmet, Inc.), (“Gourmet” and collectively with IVFH and the other subsidiaries, the “Company,“Company” or “IVFH”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All material intercompany transactions have been eliminated upon consolidation of these entities.
The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company, in accordance with generally accepted accounting principles pursuant to Regulation S-X of the Securities and Exchange Commission and with the instructions to Form 10-Q.  Certain information and footnote disclosures normally included in audited consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, these interim financial statements should be read in conjunction with the Company’s audited financial statements and related notes as contained in Form 10-K for the year ended December 31, 2014. In the opinion of management, the interim unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments, necessary for fair presentation of the interim periods presented. The results of the operations for the three months ended March 31, 2015 are not necessarily indicative of the results of operations to be expected for the full year. The results of The Fresh Diet have been included since its acquisition on August 15, 2014.

Consolidation of Variable Interest Entity

The Company consolidates the financial statements of a variable interest entity (“VIE”) in which it is the primary beneficiary. In determining whether the Company is the primary beneficiary of a variable interest entity, consideration is given to a number of factors, including the ability to direct the activities that most significantly affect the entity’s economic success as well as the Company’s exposure to absorb the losses and obligations of such entities. Late Night Express Courier Service, Inc., an independent company providing delivery services to The Fresh Diet customers, was determined to be a VIE that was required to be consolidated under Accounting Standards Codification (“ASC”) 810, Consolidation, as set forth by the Financial Accounting Standards Board (“FASB”) and accordingly, was included in the accompanying unaudited condensed consolidated financial statements as of and for the period ended September 30, 2014.March 31, 2015. All material inter-company transactions and balances of the Company’s wholly owned subsidiaries and VIE have been eliminated in consolidation.

The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company, in accordance with generally accepted accounting principles pursuant to Regulation S-X of the Securities and Exchange Commission and with the instructions to Form 10-Q.  Certain information and footnote disclosures normally included in audited consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, these interim financial statements should be read in conjunction with the Company’s audited financial statements and related notes as contained in Form 10-K for the year ended December 31, 2013. In the opinion of management, the interim unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments, necessary for fair presentation of the interim periods presented. The results of the operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results of operations to be expected for the full year. The results of The Fresh Diet have been included since its acquisition on August 15, 2014.
 
2. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
 
Business Activity
 
FII,Our business is currently conducted by our wholly-owned subsidiaries, Artisan, Food Innovations, FNM, OFB, GFG, areGourmet Foodservice Warehouse, Inc., Gourmeting, Inc., The Fresh Diet, Haley, and Gourmet.  Since its incorporation, the Company primarily through FII’s relationship with US Food, Inc. (“U.S. Foods” or “USF”), has been in the business of providing premium foodservice establishments, including white tablecloth restaurants, within 24 – 72 hours, with the freshest origin-specific perishables, and specialty food products, directand healthcare products shipped directly from its warehouses and from aour network of vendors to the end users (restaurants,and from our warehouses. Our customers include restaurants, hotels, country clubs, national chain accounts, casinos, hospitals and catering houses) acrosshouses.   Gourmet has been in the United States within 24 - 72 hours. For The Gourmet Inc., through its website www.forthegourmet.com, and through additional sales channels, provides the highest qualitybusiness of providing consumers with gourmet food products to the direct to consumer market.  FNM currently holdsshipped directly from our network of vendors and from our warehouses within 24 – 72 hours. GFG is focused on expanding the Company’s intellectual property rightsprogram offerings to additional customers.  In our business model, we receive orders from our customers and then work closely with our suppliers and our warehouse facilities 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.
6
The Fresh Diet is the nationwide leader in freshly prepared health and wellness gourmet specialty meals, using the finest ingredients, delivered directly to consumers using The Fresh Diet® platform.  The Fresh Diet’s platform includes a company managed or owned preparation and logistics infrastructure, including all rights relateda comprehensive company managed network of same day and next day last mile food delivery capabilities. Artisan is a supplier of over 1,500 niche gourmet products to over 500 customers in the Greater Chicago area.  Haley provides consulting services and other solutions to its Artistre® private label brand. clients in the food industry.  Haley is a food manufacturer representativededicated foodservice consulting and advisory firm that manages food manufacturing foodservice relationships at a food distributor’s corporate level. OFB works closely with emergingcompanies to access private label and manufacturers’ label food brandsservice opportunities with the intent of helping them launch and commercialize new products in the broadline foodservice industry and get products distributed via national broadline food distributors.  OFB is a dedicated foodservice consulting and advisory firm that works closely with companies to developaccess private label and execute sales, marketingmanufacturers’ label food service opportunities with the intent of helping them launch and distribution plans via its nationwide network of retail-related food broker relationships while providingcommercialize new products in the retail foodservice industry and provides emerging food brands distribution and shelf placement access in all of the major metro markets in the food retail industry.

The Fresh Diet is in the business of providing freshly prepared gourmet specialty meals, using the finest specialty, artisanal, direct from source ingredients, delivered daily, directly to consumers using The Fresh Diet® platform.  The Fresh Diet’s platform includes a company managed and owned preparation and logistics infrastructure, including a comprehensive company owned network of same day and next day last mile food delivery capabilities.
6

We have historically sold the majority of our products (72% and 76% of total sales in the years ended December 31, 2013 and 2012, respectively) 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 (the “Artisan Acquisition Agreement”) to acquire all of the issued and outstanding shares of Artisan Specialty Foods, Inc., an Illinois corporation (“ASF”).  ASF  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.  On November 2, 2012, the Company, through its wholly-owned subsidiary Haley, entered into an asset purchase agreement (the “Haley Acquisition”) with The Haley Group, LLC whereby the Company acquired all existing contracts between The Haley Group, LLC and its customers.  Pursuant to a purchase agreement (the “Organic Food Brokers Purchase Agreement”), effective June 30, 2014, the Company purchased 100% of the membership interest of Organic Food Brokers, LLC, a Colorado limited liability company (“OFB”).  Also, pursuant to a purchase agreement (the “The Fresh Diet Purchase Agreement”), effective August 15, 2014, the Company purchased 100% of the common stock of The Fresh Diet, Inc.
 
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 for example, certain assumptions related to doubtful accounts receivable, stock-based services, valuation of financial instruments, contingent liabilities 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. Accounts subject to estimate and judgements are accounts receivable reserves, income taxes, intangible assets, contingent liabilities, and equity based instruments. 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.

Reclassifications
Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Innovative Food Holdings, Inc., and Corrections

Certain reclassificationsits wholly owned operating subsidiaries, Artisan, Food Innovations, FNM, OFB, GFG, Gourmet Foodservice Warehouse, Inc., Gourmeting, Inc., The Fresh Diet, Haley, and Gourmet.  All material intercompany transactions have been made to conform prior period data toeliminated upon consolidation of these entities.
The Company consolidates the current presentation.financial statements of a variable interest entity (“VIE”) in which it is the primary beneficiary. In addition,determining whether the Company identifiedis the primary beneficiary of a variable interest entity, consideration is given to a number of factors, including the ability to direct the activities that most significantly affect the entity’s economic success as well as the Company’s exposure to absorb the losses and obligations of such entities. Late Night Express Courier Service, Inc., an errorindependent company providing delivery services to The Fresh Diet customers, was determined to be a VIE that was required to be consolidated under Accounting Standards Codification (“ASC”) 810, Consolidation, as set forth by the Financial Accounting Standards Board (“FASB”) and revised itsaccordingly, was included in the accompanying consolidated financial statements  for the threeyear ended December 31, 2014.   All material inter-company transactions and six months ended September 30, 2013 related to the elimination of certain intercompany revenues. Management concluded that the errors had no material impact on anybalances of the Company’s previously issued financial statements, are immaterial to the Company’s results for the second quarter of 2013wholly owned subsidiaries and full year 2013 results, and had no material effect on the trend of the Company’s financial results. As a result of the immaterial errors discussed above, the unaudited condensed consolidated financial statements reflect the following adjustments: a reductionVIE have been eliminated in cost of goods sold and an offsetting reduction in revenue of $164,808 and $731,013 for the three and nine months ended September 30, 2013, respectively.  The effect of the reclassifications and immaterial errors had no effect on reported net income.consolidation.

Revenue Recognition

The Company recognizes revenue upon product delivery. All of our products are shipped either same day or overnight or through longer  shipping terms to the customer and the customer takes title to product and assumes risk and ownership of the product when it is delivered. Shipping charges to customers and sales taxes collectible from customers, if any, are included in revenues.

For revenue from product sales, the Company recognizes revenue in accordance with Financial Accounting Standards Board “FASB” Accounting Standards Codification “ASC” 605-15-05. ASC 605-15-05 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and  determinable; and (4) collectability is reasonably assured.  Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts.  Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.  The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.

Revenue from the sale of meals is recognized when the earnings process is complete, which is upon the delivery of the product to the Company’s customers. Meal programs are sold weekly, bi-weekly and monthly. Meal programs are non-returnable and non-refundable if not cancelled within 3 days of initial delivery. Refunds of cancelled meal plans are recorded at the time of cancellation.

Deferred revenue consists of cash received for meals that have not yet been delivered to the customer.
Cost of Goods Sold
 
Costs recorded
We have included in Costcost of Goods Sold ingoods sold all costs which are directly related to the condensed consolidated statementgeneration of operationsrevenue. These costs include primarily the costscost of food and raw materials, packaging,plus kitchen expenses including payroll, contract labor, kitchen related depreciation, operating expenses, and rent; preparation, product conversion, packing and delivery.
7
Table of Contentshandling, shipping and delivery costs including delivery payroll.
 
Deferred Revenue

Deferred revenue consists of cash received for meals that have not yet been delivered to the customer.

Advertising Costs

The Company’s policy is to report advertising costs as expenses in the periods in which the costs are incurred. The total amounts charged to advertising expense were approximately $67,660$494,652 and $82,711,$4,865,  respectively, for the three and nine months ended September 30,March 31, 2015 and 2014.
 
Basic and Diluted Earnings 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 and warrants to purchase common stock, and convertible debt. Basic and diluted net loss per share is computed based on the weighted average number of shares of common stock outstanding during the period.

The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from the calculation. 
 
Anti-dilutiveDilutive shares at September 30, 2014:March 31, 2015:

For the three and nine months ended September 30, 2014,At March 31, 2015, the Company excluded fromhad outstanding convertible notes payable in the calculationaggregate principal amount of fully-diluted earnings$758,065 with accrued interest of $659,252  convertible at the rate of $0.25 per share because the effect would have been anti-dilutive: warrants to purchase 3,040,124into an aggregate of 5,669,268  shares of common stock, and a convertible note payable in the amount of $200,000 convertible at exercise prices from $0.01the rate of $1.54 into 129,871 shares of common stock.
Also at March 31, 2015, the Company had outstanding warrants for holders to purchase the following additional shares: 2,828,405 shares at a price of $0.575 per share; options to purchase 1,576,389448,011  shares at a price of common stock at exercise prices from $0.35 to $0.57$0.55 per share; and conversion options to purchase 5,772,206 shares of common stock at $0.25 per share.  The Company also excluded 210,520 shares committed to be issued because the effect would have been anti-dilutive.
Anti-dilutive94,783 shares at September 30, 2013:

For the three months ended September 30, 2013, the Company excluded from the calculation of fully-diluted earnings per share warrants to purchase 6,964,000 shares of common stock at exercise prices of $0.01 to $0.575 per share, and options to purchase 2,480,000 shares of common stock issuable at exercise prices of $0.35 to $1.60 per share. The Company also excluded 10,269,844 shares issuable upon the conversion of a note payable and accrued interest an exercise price of $0.25 per share.

For the nine months ended September 30, 2013, the Company excluded from the calculation of fully-diluted earnings per share warrants to purchase 6,964,000share; and 700,000 shares of common stock at exercise prices of $0.01 to $0.575 per share, and options to purchase 2,480,000 shares of common stock issuable at exercise prices of $0.35 to $1.60 per share. The Company also excluded 10,269,844 shares issuable upon the conversion of a note payable and accrued interest an exercise price of $0.25$0.01 per share.

Diluted earningsAlso at March 31, 2015, the Company had outstanding options for holders to purchase the following additional shares: 500,000 shares at a price of $2.00 per share was computed as followsshare; 15,000 shares at a price of $1.90 per share; 310,000 shares at a price of $1.60 per share; 100,000 shares at a price of $1.46 per share; 15,000 shares at a price of $1.44 per share; 75,000 shares at a price of $1.31 per share; 225,000 shares at a price of $0.57 per share; 132,500 shares at a price of $0.48 per share; 132,500 shares at a price of $0.474 per share; 132,500 shares at a price of $0.45 per share; 275,000 shares at a price of $0.40 per share; 92,500 shares at a price of $0.38 per share; and 1,200,000 shares at a price of $0.35 per share.

Also at March 31, 2015 , the Company has issued restricted stock units (“RSUs”) for the threepotential issuance of shares of the Company’s common stock for the purpose of aligning executives and nine months ended Septemberemployees of the Company and  for the purpose of compensation for serving as members of the Board of Directors of the Company and for the purposes of retaining qualified personnel at compensation levels that otherwise would not be available should the company have been required to pay certain salaries in cash only. Certain of the RSUs were issued to employees of The Fresh Diet (“Employee RSUs”) and certain RSUs were issued to the executive officers of the Company (“Executive RSUs”) and certain RSUs were issued to members of the board of directors of the Company (“Board RSUs”).  With respect to the Executive RSUs, effective November 17, 2014, each of the Company’s executive officers were awarded RSUs which vest according to the following schedule, provided the performance conditions are met: 150,000 RSUs vest on each of July 1 and December 31, 2015; 300,000 RSUs vest on December 31, 2016 and 400,000 RSUs vest on July 1, 2017.  On August 7, 2014, the Company’s Board of Directors approved the amendment of the employment agreements, effective as of August 13, 2014, of each of the Company’s President and CEO, providing for (i) an award to the President of 75,000 RSUs which vest on January 1, 2015 and 75,000 RSUs which vest on May 1, 2016; and (ii) an award to the CEO of 125,000 RSUs which vest if the 30 2014:

  Loss (Numerator)  Shares (Denominator)  Per-Share Amount 
Basic loss per share
 
$
(653,624
) 
  
9,374,203
  
$
(0.077
) 
Effect of Dilutive Securities:
            
Exercise of in-the-money warrants
  -   -   - 
Exercise of in-the-money options
  -   -   - 
Conversion of notes payable and accrued interest
  -   -   - 
Shares accrued, not yet issued
  -   -   - 
             
Diluted earnings per share
 
$
(653,624
) 
  
9,374,203
  
$
(0.077
) 
day average closing price of the Company’s common stock is $2.00 or above and there is a 50,000 average daily volume or if there is a 50,000 average daily volume for 14 straight  trading days; and (iii) an award to the CEO of 175,000 RSUs which vest if the 30 day average closing price of the Company’s common stock is $3.00 or above and there is a 50,000 average daily volume for 14 straight trading days.
 
 
  Income (Numerator)  Shares (Denominator)  Per-Share Amount 
Basic earnings per share
 
$
(37,777
)  
8,249,469
  
$
(0.005
)
Effect of Dilutive Securities:
            
Exercise of in-the-money warrants
  -   -   - 
Exercise of in-the-money options
  -   -   - 
Shares accrued, not yet issued
  -   -   - 
             
Diluted earnings per share
 
$
(37,777
)  
8,249,469
  
$
(0.005
)
The Employee RSUs issued to certain nonexecutive employees of the Company were issued either partially in lieu of salary, future bonuses or a combination of both bonus and salary. The Employee RSUs vest according to the following schedule: On July 1, 2015 600,000 will vest and on December 31, 2015 an additional 600,000 shares will vest. On December 31, 2016 an additional 1.2 million shares will vest and an additional 1.6 million shares will vest on July 1, 2017. Vesting is contingent on being an employee of the Company at the time of vesting. In addition, there are restrictions on the sale of such vested stock including aggregate volume restrictions and no Employee RSU shares can be sold below $2.50 per share. In addition, up to an additional 25,000 shares will vest on a monthly basis. Vesting is contingent on employment by the Company at the time of vesting, and the Company stock price closing above $2.50 per share for 20 straight days. In addition, there are restrictions on the sale of such vested stock including aggregate volume restrictions and no shares can be sold below $2.50 per share
The Company estimated that the stock-price goals of the Company’s stock price closing above $2.50 per share for 20 straight days have a 90% likelihood of achievement, and these RSUs were valued at 90% of their face value. The Company estimated that the revenue targets had a 100% likelihood of achievement, and these RSUs were valued at 100% of their face value.  We recognized stock-based compensation expense of in a straight-line manner over the vesting period of the RSUs. This resulted in stock-based compensation expense of $690,397 related to recognition of RSUs during the three months ended March 31, 2015.

Fully-diluted earnings per share was the same as basic earnings per share for the three months ended March 31, 2015 because the effect of the exercise of above instruments would be anti-dilutive.
Dilutive shares at March 31, 2014:

At March 31, 2014, the Company had outstanding convertible notes payable in the aggregate principal amount of $855,967 with accrued interest of $684,147 convertible at the rate of $0.25 per share into an aggregate of 6,160,456 shares of common stock.
Also at March 31, 2014, the Company had outstanding warrants for holders to purchase the following additional shares: 2,828,406 shares at a price of $0.575 per share; 1,507,101 shares at a price of $0.55 per share; 764,783 shares at a price of $0.25 per share; and 700,000 shares at a price of $0.01 per share.

Also at March 31, 2014, the Company had outstanding options for holders to purchase the following additional shares: 310,000 shares at a price of $1.60 per share; 75,000 shares at a price of $1.31 per share; 225,000 shares at a price of $0.57 per share; 132,500 shares at a price of $0.48 per share; 132,500 shares at a price of $0.474 per share; 132,500 shares at a price of $0.45 per share; 275,000 shares at a price of $0.40 per share; 132,500 shares at a price of $0.38 per share; and 1,240,000 shares at a price of $0.35 per share.
Diluted earnings per share was computed as follows for the three months ended March 31, 2014:

  Income (Numerator)  Shares (Denominator)  Per-Share Amount 
Basic earnings per share $188,706   7,538,537  $0.025 
Effect of Dilutive Securities:            
Exercise of in-the-money warrants      4,001,351     
Exercise of in-the-money options      1,699,997     
Shares accrued, not yet issued      323,462     
             
Diluted earnings per share $188,706   13,563,347  $0.014 
 
Significant Recent Accounting Pronouncements
 
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“this Update”) as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The Board received feedback that having different balance sheet presentation requirements for debt issuance costs and debt discount and premium creates unnecessary complexity. Recognizing debt issuance costs as a deferred charge (that is, an asset) also is different from the guidance in International Financial Reporting Standards (IFRS), which requires that transaction costs be deducted from the carrying value of the financial liability and not recorded as separate assets. Additionally, the requirement to recognize debt issuance costs as deferred charges conflicts with the guidance in FASB Concepts Statement No. 6, Elements of Financial Statements, which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. Concepts Statement 6 further states that debt issuance costs cannot be an asset because they provide no future economic benefit. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. The Company is currently evaluating the effects of adopting this ASU, if it is deemed to be applicable.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying unaudited condensed consolidated financial statements.
 
3.  ACQUISITIONS

The Fresh Diet

The Fresh Diet Merger on August 15, 2014 was accounted for as an acquisition of an ongoing business in accordance with ASC Topic 805 - Business Combinations (“ASC 805”), where the Company was treated as the acquirer and the acquired assets and assumed liabilities were recorded by the Company at their preliminary estimated fair values. The total purchase price of the assets acquired and assumed liabilities included; cash, inventory, accounts receivable, fixed assets, deposits and trade names and, accounts payable and notes payable.
 
The acquisition date estimated fair value of the consideration transferred totaled $14.0 million,$12,645,912,  which consisted of the following:

     
Common Stock - 10,000,000 shares
 
$
14,000,000
 
Total purchase price
 
$
14,000,000
 
     
Tangible assets acquired
 
$
2,462,952
 
Liabilities assumed
  
11,076,672
 
Net tangible assets
  
(8,613,720
)
Customer  relationships
  
13,505,669
 
Tradenames
  
104,271
 
Goodwill
  
9,003,780
 
Total purchase price
 
$
14,000,000
 

Cash
 
$
3,000,000
 
Common Stock – 6,889,937 shares
  
9,645,912
 
Total purchase price
 
$
12,645,912
 
     
Tangible assets acquired
 
$
2,567,223
 
Liabilities assumed
  
11,035,724
 
Net tangible assets
  
(8,468,501
)
Customer relationships
  
2,700,000
 
Tradenames
  
1,800,000
 
Goodwill
  
16,614,413
 
Total purchase price
 
$
12,645,912
 
The Company has presented its preliminary estimatesabove estimated fair value of the fair valuesintangible assets is based on a preliminary purchase price allocation prepared by management with the assistance of a third party valuation expert.  As a result, during the preliminary purchase price allocation period, which may be up to one year from the business combination date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.  After the preliminary purchase price allocation period, we record adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period in our operating results in the Fresh Diet Merger as of September 30, 2014. The Company isperiod in which the process of finalizing its review and evaluation ofadjustments were determined. 
During the appraisal and related valuation assumptions supporting its fair value estimates for all of the assets acquired and liabilities assumed in the Fresh Diet Merger and, therefore, the estimates used herein are subject to change. This may result in adjustments to the values presented above for assets and liabilities and a corresponding adjustment to goodwill. As such,three months ended March 31, 2015, the Company has not completed the assignment of goodwill to reporting units or its determination ofpaid the amount of goodwill that is expected$3,000,000 in cash to certain former shareholders of The Fresh Diet, and cancelled 3,110,063 shares of common stock with a value of $4,354,088; these shares were originally intended to be deductible for tax purposes atissued  in the acquisition of The Fresh Diet. This resulted in a decrease in the value of The Fresh Diet acquisition in the net amount of $1,354,088; this time.
9
amount was credited to goodwill during the three months ended March 31, 2015; see Note 8.

Pro forma results

The following tables settable sets forth the unaudited pro forma results of the Company as if the acquisition of FD had taken place on the first day of the periodsMarch 31, 2014 three months period presented.  These combined results are not necessarily indicative of the results that may have been achieved had the companies always been combined.
  Three months ended September 30, 
  2014  2013 
Total revenues
 
$
11,779,846
  
$
12,423,569
 
Net income attributable to Innovative Food Holdings, Inc.
  
(643,698
)
  
(1,204,273
)
Basic net income (loss) per common share
 
$
(0.033
)
 
$
(0.068
)
Diluted net income (loss) per common share
 
$
(0.033
)
 
$
(0.068
)
Weighted average shares - basic
  
19,362,464
   
17,714,385
 
Weighted average shares - diluted
  
19,362,464
   
17,714,385
 
 
 
Nine months ended September 30,
  Three months ended March 31, 
 
2014
 
2013
  2014 
Total revenues
 
$
34,667,747
 
$
40,088,938
  
$
11,679,255
 
Net income attributable to Innovative Food Holdings, Inc.
 
(1,325,617
)
 
(3,944,397
)
Basic net income (loss) per common share
 
$
(0.070
)
 
$
(0.223
)
Diluted net income (loss) per common share
 
$
(0.070
)
 
$
(0.224
)
Net (loss) income attributable to Innovative Food Holdings, Inc.
 
240,650
 
Basic net (loss) income per common share
 
$
0.017
 
Diluted net (loss) income per common share
 
$
(0.012
)
Weighted average shares - basic
 
19,064,323
 
17,714,385
  
14,428,474
 
Weighted average shares - diluted
 
19,064,323
 
17,640,756
  
20,453,284
 
 
Organic Food Brokers

Pursuant to the Organic Food Brokers Purchase Agreement,a purchase agreement, effective June 30, 2014, the Company purchased 100% of the membership interest of Organic Food Brokers, LLC, a Colorado limited liability company (“OFB”).company.  OFB is a dedicated foodservice consulting and advisory firm that works closely with emergingcompanies to access private label and manufacturers’ label food brands to developservice opportunities with the intent of helping them launch and execute sales, marketingcommercialize new products in the retail foodservice industry and distribution plans via its nationwide network of retail-related food broker relationships while providingprovides emerging food brands distribution and shelf placement access in all of the major metro markets in the food retail industry.

The purchase price consisted of (i) One Hundred Thousand ($100,000) Dollars in cash, (ii) a Convertible Promissory Note in the face amount of Two Hundred Thousand ($200,000) Dollars, and (iii) stock options issued by the Company to acquire one hundred thousand (100,000) shares of its common stock over the four year period following the closing date at an exercise price per share of $1.46. The Note is secured by the Company’s grant of a second priority secured interest in the assets of OFB.  In addition, the company is contingently liable for certain performance-based payments over the twenty-four months following the acquisition date. The Company believes it is likely that these payments will be made, and accordingly has recorded the entire amount of $225,000 as a contingent liability on its balance sheet at September 30, 2014.acquisition. During the three months ended March 31, 2015, payments in the aggregate amount of $26,250  have been made under this contingent liability; at March 31, 2015, the balance of the contingent liability was  $146,250.  The entire cost of the acquisition was $596,349.  The amount of $200,000 was allocated to Trade Name, and intangible assets with an indefinite life; the balance of $396,349$596,349, which was allocated to customer list, an intangible asset with a useful life of 3660 months. $29,817 of this amount was amortized during the three months ended September 30, 2014.March 31, 2015.

4. ACCOUNTS RECEIVABLE
 
At September 30, 2014March 31, 2015 and December 31, 2013,2014, accounts receivable consists of:
 
 
September 30,
2014
 
December 31,
2013
  
March 31,
2015
 
December 31,
2014
 
Accounts receivable from customers
 
$
1,198,436
 
$
827,945
  
$
1,339,785
 
$
1,272,470
 
Allowance for doubtful accounts
  
(33,026
)
  
(56,740
)
  
(35,662
)
  
(29,500
)
Accounts receivable, net
 
$
1,165,410
 
$
771,205
  
$
1,304,123
 
$
1,242,970
 

5. INVENTORY

Inventory consists primarily of (a) specialty food products (b)and operating materials and supplies, principally food trays and bags that areare used to package and deliver meals to customers .customers.  At September 30, 2014March 31, 2015 and December 31, 2013,2014, inventory consisted of the following:
 
 
September 30,
2014
  
December 31,
2013
  
March 31,
2015
  
December 31,
2014
 
Specialty food products
 
$
981,905
 
$
839,979
  
$
933,969
 
$
1,034,786
 
Operating materials and supplies
  
249,394
      
238,513
  
  160,541
 
Total
 
$
1,231,299
 
$
839,979
  
$
1,172,482
 
$
1,195,327
 
  
6. PROPERTY AND EQUIPMENT

The Company owns a building and property located at 28411 Race Track Road, Bonita Springs, Florida 34135 and with respect thereto has entered into each of a Loan Agreement, Mortgage, Security Agreement and Note with Fifth Third Bank, each with an effective date of February 26, 2013.  The property consists of approximately 1.1 acres of land and close toapproximately 10,000 square feet of combined office and warehouse space, and was purchased as part of a bank short sale.  The Company moved its operations to these premises on July 15, 2013. The purchase price of the property was $792,758 and was financed in part by a five year mortgage in the amount of $546,000 carrying an annual interest rate of 3% above LIBOR Rate, as such term is defined in the Note.
 
A summary of property and equipment at September 30, 2014March 31, 2015 and December 31, 2013,2014, was as follows:
 
  
September 30,
2014
  
December 31,
2013
 
Land
 
$
177,383
  
$
177,383
 
Building
  
619,955
   
619,955
 
Computer and Office Equipment
  
   502,278
   
462,508
 
Kitchen and Warehouse Equipment
  
440,167
   
7,733
 
Furniture, Fixtures, and Leasehold Improvements
  
373,359
   
162,128
 
Vehicles
  
423,971
   
33,239
 
Total before accumulated depreciation
  
2,537,113
   
1,462,946
 
Less: accumulated depreciation
  
(603,862
)
  
(508,878
)
Total
 
$
1,933,251
  
$
954,068
 
  
March 31,
2015
  
December 31,
2014
 
Land
 
$
177,383
  
$
177,383
 
Building
  
619,955
   
619,955
 
Computer and Office Equipment
  
   506,076
   
502,277
 
Warehouse Equipment
  
7,733
   
7,733
 
Furniture, Fixtures, and Leasehold Improvements
  
373,360
   
373,360
 
Kitchen Equipment
  
444,582
   
429,850
 
Vehicles
  
503,309
   
503,309
 
Total before accumulated depreciation
  
2,632,398
   
2,613,867
 
Less: accumulated depreciation
  
(776,779
)
  
(691,823
)
Total
 
$
1,855,619
  
$
1,922,044
 
 
Depreciation and amortization expense for property and equipment amounted to $51,622$84,956 and $22,402$21,604 for the three months ended September 30,March 31, 2015 and 2014, and 2013, respectively.  Depreciation and amortization expense for property and equipment amounted to $94,985 and $58,148 for the nine months ended September 30, 2014 and 2013, respectively.  

7. INVESTMENTS

The Company has made investments in certain early stage food related companies which can benefit from various synergies within the Company’s various operating businesses .businesses.  As of September 30,March 31, 2015 and December 31, 2014, the Company had made investments in twothree such companies in the aggregate amount of $104,000.$204,000, and are carried at cost. The Company does not have significant influence over the operations of the investment companies.
 

8.   INTANGIBLE ASSETS

The Company acquired certain intangible assets pursuant to the acquisition of The Fresh Diet, Artisan Specialty Foods,and OFB, and the acquisition of certain assets of The Haley Group, LLC and OFB (see note 2)3). The following is the net book value of these assets:
 
 September 30, 2014  March 31, 2015 
   Accumulated      Accumulated   
 Gross Amortization Net  Gross Amortization Net 
Trade Name
 
$
321,271
 
$
-
 
$
321,271
  
$
2,121,271
 
$
-
 
$
2,121,271
 
Non-Compete Agreement
 
244,000
 
(137,250
)
 
106,750
  
244,000
 
(167,750
)
 
76,250
 
Customer Relationships
 
14,636,663
 
(530,853
) 
 
14,105,810
  
3,830,994
 
(748,256
) 
 
3,082,738
 
Goodwill
  
9,154,780
  
-
  
9,154,780
   
16,765,413
  
-
  
16,765,413
 
Total
 
$
24,356,714
 
$
(668,103
) 
 
$
23,688,611
  
$
22,961,678
 
$
(916,006
) 
 
$
22,045,672
 
  December 31, 2014 
     Accumulated    
  Gross  Amortization  Net 
Trade Name $2,121,271  $-  $2,121,271 
Non-Compete Agreement  244,000   (152,500)  91,500 
Customer Relationships  3,830,994   (552,717)  3,278,277 
Goodwill  18,119,501   -   18,119,501 
Total $24,315,766  $(705,217) $23,610,549 
 
   December 31, 2013 
     Accumulated    
  Gross  Amortization  Net 
Trade Name
 
$
217,000
  
$
-
  
$
217,000
 
Non-Compete Agreement
  
244,000
   
(91,500
)
  
152,500
 
Customer Relationships
  
534,645
   
(167,703
)
  
366,942
 
Goodwill
  
151,000
   
-
   
151,000
 
Total
 
$
1,146,645
  
$
(259,203
)
 
$
887,442
 
12

Total amortization expense charged to operations for the three months ended September 30,March 31, 2015 and 2014 and 2013 was $309,351$210,789 and $45,970, respectively. Total amortization expense charged to operations for the nine months ended September 30, 2014 and 2013 was $401,293  and $91,940, respectively.

The trade name isnames are not considered a finite-lived asset,assets, and isare not being amortized.  The non-compete agreement isagreements are being amortized over a period of 48 months.  The customer relationships acquired in the Artisan, Haley, OFB and The Fresh Diet transactions are being amortized over periods of 60, 36, 60 and 60 months, respectively.
During the following periods:three months ended March 31, 2015, the Company paid the amount of $3,000,000 in cash to certain former shareholders of The Fresh Diet, 84 months;and cancelled 3,110,063 shares of common stock with a value of $4,354,088; these shares were originally intended to be issued  in the Artisan transaction, 60 months;acquisition of The Fresh Diet. This resulted in a decrease in the Haley transaction, 36 months; andvalue of The Fresh Diet acquisition in the OFB transaction, 60 months.net amount of $1,354,088; this amount was credited to goodwill during the three months ended March 31, 2015,
 
As detailed in ASC 350, the Company tests for goodwill impairment in the fourth quarter of each year and whenever events or changes in circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable.  As detailed in ASC 350-20-35-3A, in performing its testing for goodwill impairment, management has completed a qualitative analysis to determine whether it was more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. To complete this review, management followed the steps in ASC 350-20-35-3C to evaluate the fair value of goodwill and considered all known events and circumstances that might trigger an impairment of goodwill. The analysis completed in 2013 and 20122014  determined that there was no impairment to goodwill assets.
 
 9.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
Accounts payable and accrued liabilities at September 30, 2014March 31, 2015 and December 31, 20132014 are as follows:
 
 
September 30,
2014
  
December 31,
2013
  
March 31,
2015
  
December 31,
2014
 
Trade payables
 
$
3,863,604
  
$
1,252,746
  
$
4,048,316
  
$
3,853,374
 
Accrued payroll and commissions
  
633,120
   
32,403
   
434,304
   
243,326
 
Total accounts payable and accrued liabilities - non-related parties
 
$
4,496,724
  
$
1,285,149
  
$
4,482,620
  
$
4,096,700
 
 
12
At September 30, 2014March 31, 2015 and December 31, 2013,2014, accrued liabilities to related parties of $178,150  and $523,110, respectively, consisted of accrued payroll, accrued bonus, and payroll related benefits.
10. ACCRUED INTEREST

Accrued interest on the Company’s convertible notes payable is convertible at the option of the note holders into the Company’s common stock a price of $0.25 per share.  At September 30,March 31, 2015, convertible accrued interest was $660,752 (including $54,150 to a related party), of which $659,252 is convertible into 2,637,008 shares of common stock.  An additional $31,795 of accrued interest is not convertible into common stock. During the three months ended March 31, 2015, the Company paid cash for interest in the aggregate amount of $22,045.

At December 31, 2014, convertible accrued interest was $653,019$681,979 (including $53,621$54,150 to a related party), of which was$656,184 is convertible into 2,612,0762,623,724 shares of common stock; atstock.  An additional $1,000 of accrued interest is not convertible into common stock. During the twelve months ended December 31, 2013, convertible2014, the Company paid cash for interest in the aggregate amount of $47,820, and converted an additional $90,984 of accrued interest was $720,189 (including $48,708 to a related party) which was convertible into 2,880,756an aggregate of 363,936 shares of common stock.

11. REVOLVING CREDIT FACILITIES
  
September 30,
2014
  
December 31,
2013
 
Business loan of $500,000 from a credit card merchant, with a loan fee of 0.5% and repayment rate of 100% of the sum of charge volume during the loan period, maturing no later than April 19, 2015, renewable annually unless terminated, and secured by the assets of The Fresh Diet.   During the period from the date of The Fresh Diet acquisition (August 15, 2014) through September 30, 2014,  net payments of principal in the amount of $260,068 on this loan.   
 
$
239,932
  $- 
         
Business loan of $1,000,000  from a credit card merchant, with a loan fee of 20% and repayment rate of 12% of the sum of charge volume until all amounts have been paid, and guaranteed by certain shareholders of the Company.  During the period from the date of The Fresh Diet acquisition (August 15, 2014) through September 30, 2014, net payments of principal in the amount of $144,653 were made on this loan.   
  
657,290
   - 
         
Total 
 
$
897,222
  $- 
 
12. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
  
September 30,
2014
  
December 31,
2013
 
Secured mortgage note payable for the acquisition of land and building in Bonita Springs, Florida in the amount of $546,000.  Principal payments of $4,550 and interest at the rate of Libor plus 3% are due monthly. The balance of the principal amount will be due March 2018.  During the three months ended September 30, 2014, the Company made payments of principal and interest in the amounts of $13,650 and $3,949, respectively; during the nine months ended September 30, 2014, the Company made payments of principal and interest in the amounts of $40,950 and $7,922, respectively.
 
$
459,550
  
$
500,500
 
         
Term loan from Fifth Third Bank in the original amount of $1,000,000; $660,439 of this amount was used to pay a note payable; $339,561 was used for working capital. This loan is secured by first priority perfected security interest in all personal property of the Company, bears interest at the rate of Libor plus 4.75%, with principal monthly principal payments of $55,556 plus accrued interest. The note is due May 26, 2015.  During the three months ended September 30, 2014, the Company made payments of principal and interest in the amounts of $166,667 and $9,228, respectively; During the nine months ended September 30, 2014, the Company made payments of principal and interest in the amounts of $500,000 and $20,370, respectively
  
444,444
   
944,444
 
  
March 31,
2015
  
December 31,
2014
 
Business loan of $500,000 from a credit card merchant, with a loan fee of 0.5% and repayment rate of 100% of the sum of charge volume during the loan period, maturing no later than April 19, 2015, renewable annually unless terminated, and secured by the assets of The Fresh Diet.  During the three months ended March 31, 2015,  net payments of principal in the amount of $125,159  were made on this loan.    $-  $125,159 
         
Business loan of $1,000,000 from a credit card merchant, with a loan fee of 20% and repayment rate of 12% of the sum of charge volume until all amounts have been paid, and guaranteed by certain shareholders of the Company who were former shareholders of FD.  During the three months ended March 31, 2015, net payments of principal in the amount of $235,712 were made on this loan.     -   235,712 
         
Total  $-  $360,871 
 
 
  September 30, 2014  December 31, 2013 
A total of 18 convertible notes payable (the “Convertible Notes Payable”).  Certain of the Convertible Notes Payable contain cross default provisions, and are secured by subordinated interest in a majority of the Company’s assets. The Convertible Notes Payable bear interest at the rate of 1.9% per annum; principal and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share.  During the three months ended September 30, 2014 no principal was converted to shares of common stock, and accrued interest in the amount of $10,357 was converted to 41,428 shares of common stock.  During the nine months ended September 30, 2014, principal in the amount of $120,583 was converted to 482,332 shares of common stock, and accrued interest in the amount of $90,984 was converted to 363,936 shares of common stock.  Also during the three and nine months ended September 30, 2014, principal payments in the amount of $5,000 and $10,000, respectively, was paid in cash.  Effective May 13, 2014, the due date of these notes was extended from May 15, 2014 to December 31, 2015.  A discount to the notes in the aggregate amount of $732,565  was recorded to recognize the value of the beneficial conversion feature embedded in the extension of the term of the notes.  During the three and nine months ended September 30, 2014, $115,765  and $236,730, respectively, of this discount was charged to operations; in addition, the amount of $111,776 representing a previous discount to these notes was also charge to operations during the period.
 
$
647,565
  
$
788,148
 
         
Secured vehicle leases payable at an effective interest rate of 9.96% for purchase of truck, payable in monthly installments (including principal and interest) of $614 through January 2015. During the three  months ended September 30, 2014, the Company made payments in the aggregate amount of $1,842 on this lease, consisting of $1,753 of principal and $89 of interest. During the nine months ended September 30, 2014, the Company made payments in the aggregate amount of $5,526  on this lease, consisting of $5,131 of principal and $395 of interest. 
  
2,406
   
7,537
 
12.  NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
 
Twenty-nine convertible notes payable in the amount of $4,500 each to Sam Klepfish, the Company’s CEO and a related party, dated the first of the month beginning on November 1, 2006, issued pursuant to the Company’s then employment agreement with Mr. Klepfish, which provided that the amount of $4,500 in salary is accrued each month to a note payable.  These notes are unsecured and may not be prepaid without Mr. Klepfish’s consent.  These notes bear interest at the rate of 8% per annum and have no due date.  As of July 1, 2014, the notes bear an interest rate of 1.9% and as of November 17, 2014 the interest rate was reduced to 0%.  These notes and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share.  During the nine months ended September 30, 2014, Mr. Klepfish gifted  three  notes to an unrelated third parties.  During the three and nine months ended September 30, 2014, the Company accrued interest in the amount of $529 and $4,913, respectively, on these notes.
  
110,500
   
110,500
 
         
Promissory note in the amount of $200,000 bearing interest at the rate of 1% per annum.  Principal in the amount of $100,000 is due June 30, 2015; principal in the amount of $100,000 is due June 30, 2016.  The note is convertible into shares of the Company’s common stock at the conversion price of $1.54 per share.  During the three and nine months ended September 30, 2014, the Company accrued interest in the amount of $500 on this note.
  
200,000
   
-
 
         
Four notes payable to shareholders in the aggregate amount of $1,500,000. These notes are unsecured, bear no interest and mature on August 15, 2017. In the event the notes are not paid when due, amounts not paid under the notes shall bear interest at a rate of 21% per annum until paid in full.
  
1,500,000
   
-
 
         
Two notes payable to shareholders in the aggregate amount of $699,970. These notes are unsecured, and bear interest at the rate of 4% per annum. These notes are due on August 17, 2017.  In the event the notes are not paid when due, amounts not paid under the notes shall bear interest at a rate of 21% per annum until paid in full.  During the three and nine months ended September 30, 2014, the  interest in the amount of $8,720 accrued on these notes.
  
699,970
   
-
 
         
Note payable in monthly installments, including interest at the rate of 2% over prime (5.25% as of September 30, 2014), due October 1, 2019, and secured by all assets of The Fresh Diet, the life insurance policies maintained on two of the shareholders of the Company, and personally guaranteed by these shareholders.  During the three and nine months ended September 30, 2014, the principal payments in the aggregate amount of $1,802 were made on this note, and  interest expense in the amount of $585 was recorded.   
  
129,419
   
-
 
         
The Company has a $75,000 line of credit which bears monthly interest at the variable interest rate of 2% over prime rate. The line of credit is secured by all corporate assets and by a condominium owned by one of the shareholders.
  
75,000
   
-
 
         
Note payable in monthly installments, including interest at the rate of 1.75% over prime adjusted quarterly (5% as of September 30, 2014), due on December 20, 2017, and secured by all assets of The Fresh Diet and personally guaranteed by the spouse of one of its officers. During the three and nine months ended September 30, 2014,  principal payments in the aggregate amount of $7,766 were made on this note, and interest expense in the amount of $1,476 was recorded.   
  
  339,925
   
  -
 
  
March 31,
2015
  
December 31,
2014
 
Secured mortgage note payable for the acquisition of land and building in Bonita Springs, Florida in the amount of $546,000. Principal payments of $4,550 and interest at the rate of Libor plus 3% are due monthly. The balance of the principal amount will be due March 2018. During the three months ended March 31, 2015, the Company made payments of principal and interest in the amounts of $13,650 and $3,536, respectively. $432,250  $445,900 
         
Term loan from Fifth Third Bank in the original amount of $1,000,000; $660,439 of this amount was used to pay a note payable; $339,561 was used for working capital. This loan is secured by first priority perfected security interest in all personal property of the Company, bears interest at the rate of Libor plus 4.75%, with monthly principal payments of $55,556 plus accrued interest. The note is due May 26, 2015. During the three months ended March 31, 2015, the Company made payments of principal and interest in the amounts of $166,667 and $2,801, respectively.  111,111   277,778 
         
A total of 18 convertible notes payable (the “Convertible Notes Payable”). Certain of the Convertible Notes Payable contain cross default provisions, and are secured by subordinated interest in a majority of the Company’s assets. The Convertible Notes Payable bear interest at the rate of 1.9% per annum; principal and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share; however, the interest may be paid in cash by the Company and certain limited amounts of principle may also be prepaid in cash. Effective May 13, 2014, the due date of these notes was extended from May 15, 2014 to December 31, 2015, and in March 2015 the notes were further extended to January 1, 2016. A discount to the notes in the aggregate amount of $732,565 was recorded to recognize the value of the beneficial conversion feature embedded in the extension of the term of the notes. During the three months ended March 31, 2015, $99,157 of this discount was charged to operations. During the three months ended March 31, 2015, the Company accrued interest in the amount of $3,068 on these notes.  647,565   647,565 
         
Secured vehicle leases payable at an effective interest rate of 9.96% for purchase of truck, payable in monthly installments (including principal and interest) of $614 through January 2015. During the three months ended March 31, 2015, the Company made payments in the aggregate amount of $614 on this lease, consisting of $609 of principal and $5 of interest. The lease was paid on full in January, 2015.  -   609 
         
Twenty-nine convertible notes payable in the amount of $4,500 each to Sam Klepfish, the Company’s CEO and a related party, dated the first of the month beginning on November 1, 2006, issued pursuant to the Company’s then employment agreement with Mr. Klepfish, which provided that the amount of $4,500 in salary is accrued each month to a note payable. These notes are unsecured and may not be prepaid without Mr. Klepfish’s consent. These notes bear interest at the rate of 8% per annum and have no due date. As of July 1, 2014, the notes bear an interest rate of 1.9% and as of November 17, 2014 the interest rate was reduced to 0%. These notes and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. During the three months ended March 31, 2015, the Company accrued interest in the amount of $0 on these notes.  110,500   110,500 
         
Promissory note in the amount of $200,000 bearing interest at the rate of 1% per annum. Principal in the amount of $100,000 is due June 30, 2015; principal in the amount of $100,000 is due June 30, 2016. The note is convertible into shares of the Company’s common stock at the conversion price of $1.54 per share. During the three months ended March 31, 2015, the Company accrued interest in the amount of $500 on this note.  200,000   200,000 
 
 
  September 30, 2014  December 31, 2013 
Note payable issued for acquisition of Diet at Your Doorstep's customer lists due on May 1, 2015, and with quarterly payments in the form of 10% of revenue attributed to sales to customers who transition to the Fresh Diet's meal plans. Total payments capped at $40,000.  During the three and nine months ended September 30, 2014,  no payments were made on this loan.   
  
18,094
   
-
 
         
Unsecured note payable for purchase of website domain bearing 0% interest rate and due on November 20, 2017, with monthly payments of $1,065. During the three and nine months ended September 30, 2014,  principal payments in the amount of $1,065 were made on this loan.   
  
33,005
   
-
 
         
Capital lease obligations under a master lease agreement for vehicles payable in monthly installments, including interest rate ranging from 2.32% to at 7.5%, due on various dates through December 1, 2015, and collateralized by the vehicles. During the three and nine months ended September 30, 2014,  principal payments in the aggregate amount of $38,720 were made on these capital leases, and interest expense in the amount of $1,685 was recorded.   
  
222,135
   
-
 
         
Capital lease obligation for equipment payable in monthly installments, including interest at the rate of 20.35%, due on November 9, 2014, and collateralized by the equipment. During the three and nine months ended September 30, 2014,  principal payments in the aggregate amount of $6,036 were made on  interest expense in the amount of $817 was recorded.   
  
12,438
   
-
 
         
Secured vehicle lease payable at an effective interest rate of 8.26% for purchase of truck payable in monthly installments (including principal and interest) of $519 through June 2015. During the three months ended September 30, 2014, the Company made payments in the aggregate amount of $1,558 on this lease, consisting of $1,445 of principal and $113 of interest. During the nine months ended September 30, 2014, the Company made payments in the aggregate amount of $4,674 on this note, consisting of $4,247 of principal and $427 of interest. 
  
4,517
   
8,764
 
Total
 
$
4,898,968
  
$
2,359,893
 
Less: Discount
  
(495,835
)
  
(371,812
)
Net
 
$
4,403,133
  
$
1,988,081
 
  
March 31,
2015
  
December 31,
2014
 
Four notes payable to shareholders in the aggregate amount of $1,500,000. These notes are unsecured, currently bear no interest, and mature on August 15, 2017. In the event the notes are not paid when due, amounts not paid under the notes shall bear interest at a rate of 21% per annum until paid in full. $1,500,000  $1,500,000 
         
Two notes payable to shareholders in the aggregate amount of $699,970. These notes are unsecured, and bear interest at the rate of 4% per annum. These notes are due on August 17, 2017. In the event the notes are not paid when due, amounts not paid under the notes shall bear interest at a rate of 21% per annum until paid in full. During the three months ended March 31, 2015, the Company accrued interest in the amount of $7,000 on these notes.  699,970   699,970 
         
Note payable in monthly installments, including interest at the rate of 2% over prime (5.25% as of March 31, 2015), due October 1, 2019, and secured by all assets of The Fresh Diet, the life insurance policies maintained on two of the shareholders of the Company, and personally guaranteed by these shareholders. During the three months ended March 31, 2015, principal payments in the aggregate amount of $5,582 were made on this note, and interest expense in the amount of $1,581 was recorded.  118,344   123,926 
         
The Company has a $75,000 line of credit which bears monthly interest at the variable interest rate of 2% over prime rate. The line of credit is overdue. The line of credit is secured by all corporate assets of The Fresh Diet and by a condominium owned by one of the former shareholders of The Fresh Diet. During the three months ended March 31, 2015, interest in the amount of $984 was recorded on this line of credit.  75,000   75,000 
         
Note payable in monthly installments, including interest at the rate of 1.75% over prime adjusted quarterly (5% as of March 31, 2015), due on December 20, 2017, and secured by all assets of The Fresh Diet and personally guaranteed by the spouse of one of its officers. During the three months ended March 31, 2015, principal payments in the aggregate amount of $23,926 were made on this note, and interest expense in the amount of $3,806 was recorded.  292,411   316,337 
         
Note payable issued for acquisition of Diet at Your Doorstep's customer lists due on May 1, 2015, and with quarterly payments in the form of 10% of revenue attributed to sales to customers who transition to The Fresh Diet's meal plans. Total payments are capped at $40,000. During the three months ended March 31, 2015, payments in the amount of $0 were made on this loan.  17,935   17,935 
         
Unsecured note payable for purchase of website domain bearing 0% interest rate and due on November 20, 2017, with monthly payments of $1,065. During the three months ended March 31, 2015, principal payments in the amount of $3,195 were made on this loan.  25,550   28,745 
         
Capital lease obligations under a master lease agreement for vehicles payable in monthly installments, including interest rate ranging from 2.32% to 7.5%, due on various dates through December 1, 2015, and collateralized by the vehicles. During the three months ended March 31, 2015, principal payments in the aggregate amount of $59,458 were made on these capital leases, and interest expense in the amount of $4,709 was recorded.  166,939   226,397 
         
Secured vehicle lease payable at an effective interest rate of 8.26% for purchase of a truck payable in monthly installments (including principal and interest) of $519 through June 2015. During the three months ended March 31, 2015, the Company made payments in the aggregate amount of $1,558 on this lease, consisting of $1,505 of principal and $52 of interest.  1,537   3,042 
         
Total $4,399,112  $4,673,704 
         
Less: Discount  (297,521)  (396,678)
         
Net $4,101,591  $4,277,026 
 
During the three
15
    
  
March 31,
2015
  
December 31,
2014
 
Current maturities, net of discount
 
$
1,369,060
  
$
825,311
 
Long-term portion, net of discount
  
2,732,531
   
3,451,715
 
Total
 
$
4,101,591
  
$
4,277,026
 
  For the Three Months Ended March 31, 
  2015  2014 
Discount on Notes Payable amortized to interest expense: $99,157  $260,035 

At March 31, 2015 and nine months ended September 30,December 31, 2014, the Company amortizedhad unamortized discounts to notes payable in the amountsaggregate amount of $115,765$297,521  and $608,541,$396,678, respectively.  During the three and nine months ended September 30, 2013, the Company amortized discounts to notes payable the amounts of $175,271 and $1,337,934, respectively.

Beneficial Conversion Features

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

During the three months ended September 30, 2014, theThe Company issued its note payable in the amount of $200,000 pursuant to the acquisition of Organic Food Brokers (see Note 3). Alsodid not issue any debt with beneficial conversion features during the three months ended September 30, 2014, the Company assumed notes payable and capital leases in the aggregate amount of $4,306,774, including $2,199,970 due to related parties, pursuant to the acquisition of The Fresh Diet (see Note 3).
15
March 31, 2015 or March 31, 2014.

13.  RELATED PARTY TRANSACTIONS

For the ninethree months ended September 30,March 31, 2015:

During the three months ended March 31, 2015, the Company extended the expiration date to December 31, 2015 of certain options to purchase a total of 277,500 shares of the Company’s common stock which were held by board members and key employees.  The Company valued the options at the extended due dates using the Black-Scholes valuation model, and charged the amount of $146 to operations during the period ended March 31, 2015. (See note 15).
At March 31, 2015, the Company has loans receivable outstanding in the aggregate amount of $426,342 from four individuals who were previously owners of The Fresh Diet. The Company also has a loan receivable in the amount of $34,899 from a previously related entity.
For the three months ended March 31, 2014:

The Company issued 75,000 shares and 100,000purchased 85,950 shares of its common stock from Michael Ferrone, an individual owning greater than 5% of the outstanding shares of the Company. The purchase price was $60,000 or $0.698 per share. These shares were returned to its Chief Executive Officer and its President, respectively, for compensation previously owed.
Effective August 13, 2014, the Company amended the terms of the employment agreements of its CEO and President to, among other things, extend the agreements for one year through 2016, provide for salary increases of 10%, removal of rights to certain bonuses as currently provided for 2014 and 2015 and added a simplified EBITDA driven performance based bonus structure for  2014.  The amended terms also provide that the executives may elect to take any part of the cash portion of salary or bonus in cash or stock, but the stock portion may only be taken in stock.treasury.
 
14.  COMMITMENT AND CONTINGENT LIABILITIES

Pursuant to the Artisan acquisition, the Company was obligated to pay up to an additional $300,000, plus interest, in the event certain financial milestones are met by April 30, 2014.  This obligation had a fair value of $131,000 at the time of the Artisan acquisition.  During the three and six months ended June 30, 2014, the Company made payments in the aggregate amount of $38,536 and $77,581, respectively, against this liability. During the three months ended June 30, 2014, the Company reversed an accrual in the amount of $3,300 related to this liability. At September 30, 2014, there is no further balance due under this obligation.

Pursuant to the OFB acquisition, the Company is obligated to pay up to an additional $225,000 in the eventcontingently liable for certain financial milestones are metperformance-based payments over the twelvetwenty-four months following the acquisition date. The Company believes it is likely that these payments will be made, and accordingly recorded the entire amount of $225,000 as a contingent liability on its balance sheet at acquisition. During the three months ended March 31, 2015, payments in the aggregate amount of $26,250 againsthave been made under this liability duringcontingent liability; at March 31, 2015, the three months ended September 30, 2014, andbalance of the amount on the Company’s balance at September 30, 2014 representing thiscontingent liability is $198,750.$146,250  related to the OFB acquisition.

16
TableThe Company has recorded a contingent liability of Contents$400,000 representing the estimated potential amounts payable pursuant to certain litigation discussed below.

Litigation

From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
 

On June 1, 2012, nine persons, on behalf of themselves and others similarly situated, filed a Collective and Collective and Class Action Complaint in the New York Federal District Court, Southern District, against Late Night Express Courier Services, Inc. (FL) (“LNE”) and The Fresh Diet Inc. (“The Fresh Diet”) and certain individuals and onentitled Hernandez, et al. v. The Fresh Diet Inc., et al., Case No. 12 CV 4339.  On or about October 26, 2012, Plaintiffs filed an Amended Complaint (“Complaint”) adding additional defendants seekingindividual Defendants.  The Complaint seeks to recover alleged unpaid overtime wages on behalf of drivers for LNE who delivered meals to The Fresh Diet and/or Late Night Express who delivered mealscustomers in New York Tristatethe tri-state area.  In an Opinionopinion dated September 29, 2014 (“Opinion”), the Plaintiff's motion for summary Judgment wasDistrict Court Judge denied as was our crossthe Plaintiffs’ motion for Summary Judgment;Judgment which sought a holding that all the Plaintiff'sPlaintiffs were employees of Defendants, as was Defendants’ cross-motion for Summary Judgment seeking a holding that Plaintiffs were independent contractors, the Court finding that there were questions of fact that could not be resolved on motions.  In addition, the Plaintiffs’ motion to certify a class of 109 drivers as an increase fromwas denied.  In the 29 in the case was denied; and oursame Opinion, Defendants’ motion to decertify the case from 29 potential opt-in Plaintiffs down to the 89 named defendantsPlaintiffs was granted.granted, and the possible claims of the remaining 20 were dismissed without prejudice.   On or about February 24, 2015, a second action was filed in the New York Federal District Court, Southern District, on behalf of 6 (of the 20) additional driver-Plaintiffs entitled Hernandez, et al. v. The Fresh Diet Inc., et al. 15 CV 1338, containing essentially the same allegations, and adding the Company as a party defendant because of its acquisition of LNE.  In addition, two of the Plaintiffs from the Complaint also joined the second lawsuit asserting claims for retaliation.  The two cases were assigned to the same Federal Judge (since they are related), but were not consolidated for discovery or trial.  Prior to the second action and on January 21, 2015, the parties appeared before Federal Magistrate Judge Cott for mediation.  The Magistrate Judge did not succeed in settling the case.  On March 17, 2015, the Federal Judge stayed both cases, and referred both of them to the Court’s mediation program for further mediation within 60 days.  The Company believes that mediation may lead to a global settlement with all existing Plaintiffs.  With respect to the second instituted litigation, inasmuch as the litigation is in its early phase and discovery has not commenced it is too speculative to predict an outcome.  However, we believe we will have available to us many of the same defenses as in the first litigation and therefore do not believe that our exposure, if any at all, will likely exceed the amount of the first litigation, even if additional persons file claims.  Accordingly, given the uncertainty of both of these cases and given the additional Plaintiffs in the second action, the Company has recorded a contingent liability of $250,000$400,000 representing the estimated potential amounts payable pursuant to this litigation, but believesin the actuallitigations, even though it is possible that the amount of liability or settlement may actually be much less.less than the reserved amount.

On September 3, 2014 the registrant’sCompany’s subsidiary was served a complaint by Monolith Ventures, Ltd., in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida (the “Complaint”“Monolith Complaint”). The plaintiff listed in theMonolith Complaint, which was brought by a shareholder of less than 24% of the outstanding shares of The Fresh Diet Inc., seekssought to attack the registrant’s then recently concluded acquisition of The Fresh Diet Inc., which was approved by a majority of theThe Fresh Diet shareholders.  In the Complaint, the plaintiff asks the court to set aside the transaction. The registrant believes the Complaint is without merit, contains numerous factual errors,action has been settled and the registrant is confident that it will prevail.lawsuit discontinued with the exchange of general releases. On March 6, 2015 we completed the settlement of this action by purchasing plaintiff’s shares of the Company for an aggregate price of $3 million (equal to a below market price of $0.9646 per share) and the lawsuit was discontinued with the exchange of general releases.
 
15. EQUITY
 
Common Stock
 
At September 30, 2014March 31, 2015 and December 31, 2013, 214,4092014, a total of 700,663 shares are deemed issued but not outstanding by the Company.
 
NineThree months ended September 30,March 31, 2015:

The Company sold 3,178,420 shares of common stock at a price of $0.9646 per share and an additional 943,829 shares at a price of $1.30 per share  in a private placement for net cash proceeds of $4,288,596.

The Company paid $3,000,000 cash  for the purpose of acquiring, in a block sale, the shares of Monolith Ventures Ltd, a former shareholder of The Fresh Diet, who agreed to sell its position of 3,110,063 shares at a price of $0.9646 per share. The Company cancelled these 3,110,063 shares during the three months ended March 31, 2015.

The Company issued 727,272 shares of common stock pursuant to the exercise of warrants for cash of $400,000.

The Company issued 40,000 shares of common stock pursuant to the exercise of stock options for cash of $15,200.

Three months ended March 31, 2014:
 
The Company completed an equity financing whereby 1,585,000issued 360,354 shares of common stock were sold at a pricefor the conversion of $1.00 per shareprincipal in the amount of $42,681 and accrued interest in the amount of $47,408 for a total conversion value of $1,585,000.  The financing was an exempt private placement under Regulation D with offers and sales made only to “accredited investors” without the use of public advertising.  At September 30, 2014, 1,235,000 of these shares have been issued, and an additional 250,000 have been subscribed for $250,000 cash, which is carried on the Company’s balance sheet as Common Stock Subscribed. An additional 100,000 shares were sold for $100,000 cash subsequent to September 30, 2014.$90,089.
 
The Company issued 16,20216,203 shares of common stock for the cashless exercise of warrants.

The Company issued 17,248 shares of common stock with a fair value of $17,593 to a service provider.

The Company issued 1,001,819 shares of common stock for the exercise of warrants for an aggregate exercise price of $350,000.

The Company issued 846,266 shares of common stock upon  conversion of $120,583 of principal and $90,984 of accrued interest on notes payable.

The Company issued 175,000 shares of common stock to officers for shares owed and previously accrued at $65,835

Pursuant to the acquisition of The Fresh Diet, the Company issued 6,889,937 shares of common stock with a fair value of $1.40 for a total cost of $9,645,912.  The Company also recorded the issuance of an additional 3,110,063 shares of common stock with a fair value of $1.40 per share to shareholders of The Fresh Diet who have not yet submitted their shares of The Fresh Diet to the Company (see Note 3).
The Company purchased 85,950 shares of the Company’s outstanding common stock.  The purchase price was $60,000 and the Company recorded the transaction at cost to Treasury Stock.  In addition, the Company has an additional 400,304 shares of common stock which are held in treasury stock at a cost of $100,099.
 
 
Warrants
 
The following table summarizes the significant terms of warrants outstanding at September 30, 2014.March 31, 2015. These warrants may be settled in cash and, unless the underlying shares are registered, via cashless conversion, into shares of the Company’s common stock at the request of the warrant holder. These warrants were granted as part of a financing agreement:
 
   Weighted Weighted   Weighted     Weighted Weighted   Weighted 
   average average   average     average average   average 
Range ofRange of Number of remaining exercise   exercise Range of Number of remaining exercise   exercise 
exerciseexercise warrants contractual price of Number of price of exercise warrants contractual price of Number of price of 
PricesPrices Outstanding life (years) outstanding Warrants warrants Exercisable exercisable Warrants Prices Outstanding life (years) outstanding Warrants warrants Exercisable exercisable Warrants 
$
0.010
 
700,000
 
5.63
 
$
0.010
 
700,000
 
$
0.010
 
0.010
 
700,000
 
5.13
 
$
0.010
 
700,000
 
$
0.010
 
                        
$
0.250
 
94,783
 
1.34
 
$
0.250
 
94,783
 
$
0.250
 
0.250
 
94,783
 
0.84
 
$
0.250
 
94,783
 
$
0.250
 
                        
$
0.550
 
1,175,281
 
 
2.34
 
$
0.550
 
1,175,281
 
 
$
0.550
 
0.550
 
448,011
 
1.84
 
$
0.550
 
448,011
 
$
0.550
 
                        
$
0.575
  
2,828,405
  
2.34
 
$
0.575
  
2,828,405
 
$
0.575
 
0.575
  
2,828,405
  
1.84
 
$
0.575
  
2,828,405
 
$
0.575
 
   
4,798,469
  
2.80
 
$
0.480
  
4,798,469
 
$
0.480 
    
4,071,199
  
2.39
 
$
0.468
  
4,071,199
 
$
0.468 
 
 
Transactions involving warrants are summarized as follows:
 
 Number of Weighted Average  Number of Weighted Average 
 Warrants Exercise Price  Warrants Exercise Price 
Warrants outstanding at December 31, 2013
 
5,819,129
 
$
0.457
 
Warrants outstanding at December 31, 2014
 
4,798,469
 
$
0.480
 
          
Granted
 
-
 
-
  
-
 
-
 
Exercised
 
(1,020,660
) 
 
0.348
  
(727,270
) 
 
0.550
 
Cancelled / Expired
  
-
  
-
   
-
  
-
 
          
Warrants outstanding at September 30, 2014
  
4,798,469
 
$
0.480
 
Warrants outstanding at March 31, 2015
  
4,071,199
 
$
0.468
 
 
During the three months ended September 30, 2014,March 31, 2015, warrants to purchase a total of 18,841727,270 shares of common stock at a price of $0.25$0.55 were exercised in cashless conversion transactions; this resulted in the net issuance of 16,602  shares of common stock.  During the nine months ended September 30, 2014, warrants to purchase 670,000  shares of common stock were exercised at  price of $0.25  per share for a total of $167,500, and warrants to purchase 331,819 shares of common stock were exercised at a price of $0.55 per share for a total of $182,500.$400,000.  There were no warrants issued during the period.
 
 
18

Options

The following table summarizes the changes outstanding and the related prices for the options to purchase shares of the Company’s common stock issued by the Company:  

     Weighted   Weighted       Weighted   Weighted 
   Weighted average   average     Weighted average   average 
   average exercise   exercise     average exercise   exercise 
Range ofRange of Number of Remaining price of Number of price of Range of Number of Remaining price of Number of price of 
exerciseexercise options contractual outstanding options exercisable exercise options contractual outstanding options exercisable 
PricesPrices Outstanding life (years) Options Exercisable Options Prices Outstanding life (years) Options Exercisable Options 
$
0.350
 
1,240,000
 
1.00
 
$
0.350
 
1,240,000
 
$
0.350
 
0.350
 
1,200,000
 
2.43
 
$
0.350
 
1,200,000
 
$
0.350
 
                        
$
0.380
 
132,500
 
0.19
 
$
0.380
 
132,500
 
$ 
0.380
 
0.380
 
92,500
 
0.75
 
$
0.380
 
92,500
 
$ 
0.380
 
                        
$
0.400
 
275,000
 
2.13
 
$
0.400
 
25,000
 
$
0.400
 
0.400
 
275,000
 
1.76
 
$
0.400
 
150,000
 
$
0.400
 
                        
$
0.450
 
 132,500
 
0.34
 
$
0.450
 
132,500
 
$
0.450
 
0.450
 
 132,500
 
0.60
 
$
0.450
 
132,500
 
$
0.450
 
                        
$
0.474
 
132,500
 
0.47
 
$
0.474
 
132,500
 
$
0.474
 
0.474
 
132,500
 
0.68
 
$
0.474
 
132,500
 
$
0.474
 
                        
$
0.480
 
132,500
 
0.60
 
$
0.480
 
132,500
 
$
0.480
 
0.480
 
132,500
 
0.75
 
$
0.480
 
132,500
 
$
0.480
 
                        
$
0.570
 
225,000
 
3.26
 
$
0.570
 
-
 
$
N/A
 
0.570
 
225,000
 
2.76
 
$
0.570
 
225,000
 
$
0.570
 
                        
$
1.310
 
75,000
 
3.92
 
$
1.310
 
-
 
$
N/A
 
1.310
 
75,000
 
3.43
 
$
1.310
 
12,500
 
$
1.310
 
                        
$
1.440
 
15,000
 
3.01
 
$
1.440
 
15,000
 
$
1.440
 
1.440
 
15,000
 
1.59
 
$
1.440
 
15,000
 
$
1.440
 
                        
$
1.460
 
100,000
 
3.75
 
$
1.460
 
100.000
 
$
1.460
 
1.460
 
100,000
 
3.25
 
$
1.460
 
100,000
 
$
1.460
 
                        
$
1.600
 
310,000
 
4.23
 
$
1.600
 
155,000
 
$
1.600
 
1.600
 
310,000
 
2.76
 
$
1.600
 
310,000
 
$
1.600
 
                        
$
  1.900
  
  15,000
  
5.87
 
$
  1.900
  
15,000
 
$
 1.900
 
1.900
 
15,000
 
2.59
 
$
1.900
 
15,000
 
$
1.900
 
   
2,785,000
  
1.75
 
$
0.594
  
2,080,000
 
$
0.519
             
$
  2.000
  
500,000
  
1.92
 
$
  2.000
  
500,000
 
$
2.000
 
   
3,205,000
  
2.13
 
$
0.833
  
3,017,500
 
$
0.841
 
  
Transactions involving stock options are summarized as follows:
 
 Number of Shares 
Weighted Average
Exercise Price
  Number of Shares 
Weighted Average
Exercise Price
 
Options outstanding at December 31, 2013
 
2,580,000
 
$
0.544
 
Options outstanding at December 31, 2014
 
3,245,000
 
$
0.822
 
          
Granted
 
205,000
 
$
1.44
  
-
 
$
-
 
Exercised
 
-
 
-
  
(40,000
) 
 
0.350
 
Cancelled / Expired
  
-
 
$
-
   
-
 
$
-
 
          
Options outstanding at September 30, 2014
  
2,785,000
 
$
0.594
 
Options outstanding at March 31, 2015
  
3,205,000
 
$
0.833
 
 
Aggregate intrinsic value of options outstanding and exercisable at September 30,March 31, 2015 and 2014 was $2,450,745 and 2013 was $2,124,120 and $1,247,370,$2,377,370, respectively.  Aggregate intrinsic value represents the difference between the Company's closing stock price on the last trading day of the fiscal period, which was $1.42$1.58 and $1.05$1.70 as of September 30,March 31, 2015 and 2014, and 2013, respectively, and the exercise price multiplied by the number of options outstanding.

During the nine months ended September 30, 2014, the Company issued options to purchase 75,000 shares of common stock at a price of $1.31 per share with the following terms: four-year options to purchase 12,500 shares vest on December 31, 2014; four-year options to purchase 12,500 shares vest on December 31, 2015; and five-year options to purchase 50,000 shares vest on December 31, 2016.  The Company also issued 100,000 stock options at a price of $1.46 per share valued at $71,349 in connection with the acquisition, 15,000 stock options at a price of $1.44 per share, and 15,000 stock options at a price of $1.90  per share, all of which vested up issuance.
 
 
19

During the three and nine months ended March 31, 2015, the Company extended the expiration date of certain options to purchase a total of 277,500 shares of the Company’s common stock which were held by board members and key employees. The expiration dates of options to purchase 92,500 shares of common stock at a price of $0.38 per share were extended from March 31, 2015 to December 31, 2015; the expiration dates of options to purchase 92,500 shares of common stock at a price of $0.45 per share were extended from June 30, 2015 to December 31, 2015; and the expiration dates of options to purchase 92,500 shares of common stock at a price of $0.474 per share were extended from September 30, 2015 to December 31, 2015.  The Company valued the options at the extended due dates using the Black-Scholes valuation model, and charged the amount of $146 to  operations during the period ended March 31, 2015.

During the three months ended March 31, 2015 and 2014, the Company charged a total of $95,304$69,206 and $143,262, respectively, to operations related to recognized stock-based compensation expense for employee stock options; during the three and nine months ended September 30, 2013, the Company charged a total of $0 and $35,662,$8,713, respectively, to operations related to recognized stock-based compensation expense for employee stock options.

Accounting for warrants and stock options

The Company valued warrants and options using the Black-Scholes valuation model utilizing the following variables: 
 
  March 31,  March 31, 
  2015  2014 
Volatility
  
49.18
%
  
189.28
% 
Dividends
 
$
-
  
$
-
 
Risk-free interest rates
  
0.14
% 
  
0.37
%
Term (years)
  
0.17 – .92
  
  
4.00
 
Restricted Stock Units (“RSUs”)

  September 30,  September 30, 
  2014  2013 
Volatility
  
89.42 - 189.71
%
  
186.46 - 189.28
% 
Dividends
 
$
-
  
$
-
 
Risk-free interest rates
  
 0.37
% 
  
0.04 - 0.37
%
Term (years)
  
4.00 
  
  
0.45 - 4.00
 
Company has issued restricted stock units (“RSUs”) for the potential issuance of shares of the Company’s common stock for the purpose of aligning executives and employees of the Company and  for the purpose of compensation for serving as members of the Board of Directors of the Company and for the purposes of retaining qualified personnel at compensation levels that otherwise would not be available should the company have been required to pay certain salaries in cash only. Certain of the RSUs were issued to employees of The Fresh Diet (“Employee RSUs”) and certain RSUs were issued to the executive officers of the Company (“Executive RSUs”) and certain RSUs were issued to members of the board of directors of the Company (“Board RSUs”). With respect to the Executive RSUs, effective November 17, 2014, each of the Company’s executive officers were awarded RSUs which vest according the following schedule, provided the performance conditions are met: 150,000 RSUs vest on each of July 1 and December 31, 2015; 300,000 RSUs vest on December 31, 2016 and 400,000 RSUs vest on July 1, 2017. On August 7, 2014, the Company’s Board of Directors approved the amendment of the employment agreements, effective as of August 13, 2014, of each of the Company’s President and CEO, providing for (i) an award to the President of 75,000 RSUs which vested on January 1, 2015 and 75,000 RSUs which vest on May 1, 2016; and (ii) an award to the CEO of 125,000 RSUs which vest if the 30 day average closing price of the Company’s common stock is $2.00 or above and there is a 50,000 average daily volume or if there is a 50,000 average daily volume for 14 straight  trading days; and (iii) an award to the CEO of 175,000 RSUs which vest if the 30 day average closing price of the Company’s common stock is $3.00 or above and there is a 50,000 average daily volume for 14 straight trading days
 
The Employee RSUs issued to certain nonexecutive employees of the Company were issued either partially in lieu of salary, future bonuses or a combination of both bonus and salary. The Employee RSUs vest according to the following schedule: On July 1, 2015 600,000 shares will vest and on December 31, 2015 an additional 600,000 shares will vest. On December 31 2016 an additional 1.2 million shares will vest and an additional 1.6 million shares will vest on July 1, 2017. Vesting is contingent on being an employee of the Company at the time of vesting. In addition, there are restrictions on the sale of such vested stock including aggregate volume restrictions and no Employee RSU shares can be sold below $2.50 per share. In addition, up to an additional 25,000 shares will vest on a monthly basis. Vesting is contingent on continued employment at the time of vesting and the Company stock price closing above $2.50 per share for 20 straight days. In addition there are restrictions on the sale of such vested stock including aggregate volume restrictions and no shares can be sold below $2.50 per share

The Company estimated that the stock-price goals of the Company’s stock price closing above $2.50 per share for 20 straight days have a 90% likelihood of achievement, and these RSUs were valued at 90% of their face value. The Company estimated that the revenue targets had a 100% likelihood of achievement, and these RSUs were valued at 100% of their face value.  We recognized stock-based compensation expense of in a straight-line manner over the vesting period of the RSUs. This resulted in stock-based compensation expense of $690,397 related to recognition of RSUs during the three months ended March 31, 2015.

20

16. NONCONTROLLING INTEREST

The carrying value and ending balance of the noncontrolling interest at September 30, 2014March 31, 2015 was calculated as follows:
 
  
    
Carrying value of noncontrolling interest acquired with the Fresh Diet Merger $674 
Loss attributable to noncontrolling interest  39,563 
Ending balance of noncontrolling interest at September 30, 2014 $40,237 
Balance of noncontrolling interest at December 31, 2014
 
$ 
1,184
 
Loss attributable to noncontrolling interest for the three months ended March 31, 2015
  
(1,544
)
Ending balance of noncontrolling interest at March 31, 2015
 
$
(360
) 
 
17.  SUBSEQUENT EVENTS

The employment agreements for each of Sam Klepfish and Justin Wiernasz, the Corporation’s CEO and President, respectively, were amended effective November 17, 2014 to provide upon a change of control for acceleration of equity awards and removal of restrictions thereon and a payment in the event of a termination without Cause.  Messrs. Klepfish and Wiernasz were also each awarded, to further retention of qualified management, to further incentivize management,  and to further align management with the new capital structure post the acquisition of The Fresh Diet, Restricted Stock Units ( RSU)  effective November  17, 2014, in the following amounts: 300,000 restricted stock units (“RSU”) which vest between July 31, 2015 and December 31, 2015, 300,000 RSUs  which vest December 31, 2016 and 400,000 RSUs which vest July 1, 2017, subject to performance and customary vesting conditions.  
 
2021
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
FORWARD LOOKING STATEMENTS

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 3a51-13(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 our behalf.  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 integrate the operations of our acquired businesses,
● Our dependence on one major customer, our contract with whom ends in December 2014, and while we are negotiating a multi-year extension, no assurance can be given that the negotiations will be successful,
  
● 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,
 
● Our ability to integrate new acquisitions into our existing operations,
●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 environmental weather conditions.
 
We are also subject to other risks detailed from time to time in our other filings with 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.
 
 
2122

Critical Accounting Policy and Estimates

Use of Estimates in the Preparation of Financial Statements

The preparation of thethese financial statements included in this report 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.

Stock options:Doubtful Accounts Receivable
 
The Company maintained an allowance in the amount of $35,662 for doubtful accounts for optionsreceivable at March 31, 2015, and $64,443  at March 31, 2014. 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 FASB ASC 718-40.  Options are valued upon issuance utilizingwith accounting principles generally accepted in the Black-Scholes valuation model.   Option expense is recognized over the requisite service periodUnited States of America. The estimated fair values approximate their carrying value because of the related option award. 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 2012, the Company removed  these liabilities from its balance sheet  by  reclassifying them as equity.
Income Taxes
The following table illustrates certain key information regarding our optionsCompany has a history of losses, and option assumptions duringas such has recorded no liability for income taxes. Until such time as the nine months ended September 30, 2014 and 2013: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.
 
  September 30, 
  2014  2013 
Number of vested options outstanding
  
2,080,000
   
2,480,000
 
         
Number of options issued during the period
  
205,000
     
Number of options vested during the period
  
160,000
     
Value of options vested during the period
 
$
114,136
   
-
 
         
         
Black-Scholes model variables:
        
Volatility
 
89.42 - 189.71
%
 
186.46
%
Dividends
 
$
-
  
$
-
 
Risk-free interest rates
  
0.37
%
  
0.42 - 0.82
%
Term (years)
  
4.00
   
0.04 - 6.74
 
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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 weWe changed our name to Fiber Application Systems Technology, Ltd.
Ltd in February 2003. In January 2004, we changed our state of incorporation by merging into Innovative Food Holdings, Inc. (“IVFH”)(IVFH), a Florida shell corporation.corporation formed for that purpose. As a result of the merger, we changed our name to  that of Innovative Food Holdings, Inc. In FebruaryJanuary 2004, we also acquired Food Innovations, Inc. (“FII” or “Food Innovations”) and through FII and, a Delaware corporation, for 500,000 shares of our other subsidiaries we are in the business of national food distribution and sales using third-party shippers. 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 by April 30, 2014.over the next one or two years.  Those milestones have been met. The purchase price was primarily financed via a loan from Alpha Capital in the principal amount of $1,200,000. The loan was repaid in November 2013 via the issuance of a loan from Fifth Third Bank.  Prior to the acquisition, Artisan was a vendorsupplier and had sold products to the Company.
Pursuant to an asset purchase agreement, effective November 2, 2012, the Company purchased the outstanding assets of The Haley Group, LLC. Pursuant to a purchase agreement, effective June 30, 2014, the Company purchased 100% of the membership interest of Organic Food Brokers, LLC, a Colorado limited liability company (“OFB”).LLC.
 
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On August 15, 2014, pursuant to a merger agreement, (the “Fresh Diet Merger Agreement”), the Company acquired The Fresh Diet, Inc. (“FD”) through a reverse triangular merger as the registrant created a subsidiary corporation (FD Acquisition Corp) that merged with and into FD with FD being the surviving corporation and becoming a wholly-owned subsidiary of the registrant.  FD is the nationwide leader in freshly prepared gourmet specialty meals, using the finest specialty, artisanal, direct from source ingredients, delivered daily, directly to consumers using The Fresh Diet® platform.  The Fresh Diet’s platform includes a company managed and owned preparation and logistics infrastructure, including a comprehensive company owned network of same day and next day last mile food delivery capabilities.Company.  The purchase price consisted of 10,000,000 shares of the registrant’sCompany’s common stock valued at $14,000,000.  TheDuring the three months ended March 31, 2015, the company cancelled 3,110,063 of these shares with a value of $4,354,088 in exchange for a cash payment of $3,000,000 to former Fresh Diet  shareholders. At the time of acquisition, the majority of FD’s current liabilities consistconsisted of approximately $3.8 million of deferred revenues and approximately $2.1 million in short term commercial loans and there arewere additional ordinary course of business expenses such as trade payables, payroll and sales taxes which variesvary from month to month. In addition, it hashad some long term obligations the bulk of which consist of interest free loans from FD’s former shareholders in the amount of approximately $2.2 million which are not due for three years.  Prior to the merger FD had purchased an immaterial amount of product from the registrant.  It is anticipated thatCompany.  FD will operateoperates as an independent subsidiary subject to oversight of its board of directors and the registrant’sCompany’s President and CEO and that two of FD’s executive officers will be appointed to the registrant’s board of directors.CEO.

Transactions With a Major Customer
 
Transactions with a major customer and related economic dependence information is set forth immediately below and above in Note 2 to the Condensed Consolidated Financial Statements and also in our Annual Report on Form 10-K for the year ended December 31, 20132014 (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.

Relationship with U.S. Foods

In February 2010, oneThe Company’s largest customer, US Foods, Inc. and its affiliates, accounted for approximately 42.5% and 76.5% of total sales in the three months ended March 31, 2015 and 2014, respectively.  A contract between our subsidiaries,subsidiary, Food Innovations, signed a new contract with U.S. Foods (“USF”).  This  contract withInc. and USF expired onentered an optional renewal period in December 31, 2012.  However, the contract provides that it2012 but was automatically renewsextended for an additional 12-month12 months in each of January 1, 2013 and 2014.  On January 26, 2015 we executed a Vendor Program Agreement between Food Innovations, Inc., our wholly-owned subsidiary, and U.S. Foods, Inc.  The term unless eitherof the Agreement is from January 1, 2015 through December 31, 2016 and provides for up to three (3) automatic annual renewals thereafter if no party notifiesgives the other in writing 30 days prior to the end datedays’ notice of its intent not to renew. Inasmuch as neither party gave the requisite notice, the agreement was automatically extended through December 31, 2013 and again through December 31, 2014. Discussions are currently ongoing with respect to entering into a new multi-year agreement.   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 three months ended September 30, 2014 and 2013, sales to USF accounted for 57% and 72% of total sales, respectively. During the nine months ended September 30, 2014 and 2013, sales to USF accounted for 68% and 70% of total sales, respectively.

RESULTS OF OPERATIONS

The following is a discussion of our financial condition and results of operations for the three and nine months ended September 30, 2014March 31, 2015 and 2013.2014.

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 unaudited condensed consolidated financial statements, the notes thereto and other financial information included elsewhere in the report.
 
24
Three Months Ended September 30, 2014March 31, 2015 Compared to Three Months Ended September 30, 2013March 31, 2014

Revenue

Revenue increased by $2,917,651,$5,628,351 or approximately 50.0%,101.4% to $8,757,934$11,181,817 for the three months ended September 30, 2014March 31, 2015 from $5,840,283$5,553,466 in the prior year.  $2,182,219, or 74.8%Approximately $4,604,969 of the��increase was attributable to revenue associated with The Fresh Diet, Inc. which the Company acquired effective August 15, 2014, and approximately $1,023,382 of the increase was attributabledue to acquisitions the Company made during the period.  The balanceorganic growth of the increase, or $735,432, wasCompany.  In addition, as a result of the acquisition, pursuant to GAAP accounting rules governing the fair value of deferred revenue in an acquisition, the Company’s gross sales were reduced in the amount of $361,227 due to year-over-year organic sales growth.the amortization of the discount on acquired deferred revenue.
 
We continue to assess the potential of new revenue sources from the manufacture and sale of proprietary food products and additional sales channel opportunities in both the foodservice and consumer space 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 revenuespecialty foods and gross margin and, therefore, our profitability and cash flows could be adversely affected.
23
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 three months ended September 30, 2014 was $6,577,167,  an increase of $2,415,402  or approximately 58.0% compared to cost of goods sold of $4,161,765 for the three months ended September 30, 2014. $1,769,379 or 73.2%  of the increase was attributable to acquisitions the Company made during the period.  Cost of goods sold is primarily made up of the following expenses for the three months ended September 30, 2014: cost of goods of specialty, meat, game, cheese poultry, prepared meals and other sales categories in the amount of $3,551,746; and shipping, packaging, and delivery expenses in the amount of $3,025,421.  Total gross margin was approximately 24.9% of sales in the third quarter of 2014, compared to approximately 28.7% of sales in the third quarter of 2013.
In 2014, we continued to 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 likely remain stable.
Selling, general and administrative expenses
Selling, general, and administrative expenses increased by $1,391,114 or approximately 108.5%  to $2,673,836 during the three months ended September 30, 2014 compared to $1,282,722 for the three months ended September 30, 2013.  $1,061,524 or 76.3% of the increase was attributable to acquisitions the Company made during the period. Selling, general and administrative expenses were primarily made up of the following for the three months ended September 30, 2014: payroll and related expenses, including employee benefits, in the amount of $1,390,827; facilities and office expense in the amount of $152,986; consulting and professional fees in the amount of $271,378; amortization and depreciation in the amount of $338,712;  travel and entertainment expenses in the amount of $49,344; insurance expense in the amount of $92,271; computer support expenses in the amount of $48,055; banking and credit card fees expenses in the amount of $92,146; taxes in the amount of $81,346; vehicle expense in the amount of $21,016; marketing costs in the amount of $18,365; advertising in the amount of $67,660; and bad debt expense in the amount of $31,041.  
Other Income

Other income increased by $25,495 to $25,495 during the three months ended September 30, 2014 compared to $0 for the three  months ended September 30, 2013.  The increase in other income was due to gains on the sale of property and equipment in the amount of $24,495.  There were no comparable transactions during the three months ended September 30, 2013.
Interest expense

Interest expense, net of interest income, decreased by $587,067 or approximately 80.0%  to $146,487 during the three months ended September 30, 2014, compared to $733,554 during the three months ended September 30, 2013.  Approximately 21.0% or $30,722 of the interest expense was accrued or paid interest on the company’s notes payable; approximately 79.0% or $115,765 of the interest expense was  non-cash interest expense associated with the amortization of the discounts on the Company’s notes payable.
Net income attributable to variable interest entities

During the three months ended September 30, 2014, the Company recognized income of $39,563  from a variable interest entity acquired as part of the acquisition of The Fresh Diet during the current period.  There was no such income or loss in the comparable period of the prior year.
Net Income attributable to Innovative Food Holdings, Inc.
For the reasons above, the Company had a net loss for the three months ended September 30, 2014 of $653,624, which is an increase of $315,866  or approximately 93.5% compared to a net loss of $337,758 during the three months ended September 30, 2013.
24
Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Revenue

Revenue increased by $4,360,169  or approximately 26.6%  to $20,760,427 for the nine months ended September 30, 2014 from $16,400,258 in the prior year.  $2,182,219 or 50.5% of the increase was attributable to acquisitions the Company made during the period.  The balance of the increase, or $2,177,950, was due to year-over-year organic sales growth.
We continue to assess the potential of new revenue sources from the production and sale of proprietary food products, additional product lines, additional direct to consumer markets  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 and food productiondelivered meals 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 ninethree months ended September 30, 2014March 31, 2015 was $14,771,298,$8,185,305, an increase of $3,110,438$4,455,450 or approximately 26.7%119.5% compared to cost of goods sold of $11,660,860$3,729,855  for the ninethree months ended September 30,March 31, 2014. $1,769,379 or 56.9% of theThe increase was primarily attributable to acquisitionscosts associated with The Fresh Diet, which the Company made during the period.acquired effective August 15, 2014 and to an increase in organic revenues. Cost of goods sold is primarily made up of the following expenses for the ninethree months ended September 30, 2014:March 31, 2015: cost of goods of specialty, meat, game, cheese, seafood, poultry prepared meals and other sales categories in the amount of $9,574,719;$3,433,903; and kitchen operating expenses including payroll, rents, depreciation, and preparation; shipping packaging, and delivery expenses including payroll and handling; and purchase allowance expenses in the amount of $5,196,579.$4,751,402.  Total gross margin was approximately 28.8%26.8% of sales in the first three quarters of 2014,2015, compared to approximately 28.9%32.8% of sales in 2014. The decrease in gross margins for 2015 are primarily attributable to the first three quartersoperations of 2013.The Fresh Diet which we acquired on August 15, 2014. The operations of The Fresh Diet also included a non-cash operational charge associated with the valuation of deferred revenues which had the effect of lowering Fresh Diet’s gross margin.
   
In 2014,2015, we continued to 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 likelyeither remain stable. We currently expect, if market conditions remain constant and revenues increase, that our cost of goods sold as a percentage of revenues willstable or possibly improve slightly.
 
Selling, general and administrative expenses
 
Selling, general, and administrative expenses increased by $1,653,374$3,513,285 or approximately 44.8%256.8% to $5,345,053$4,881,396 during the ninethree months ended September 30, 2014March 31, 2015 compared to $3,691,679$1,368,111 for the ninethree months ended September 30, 2013. $1,061,524  or 64.2% % of theMarch 31, 2014. The increase was attributable to acquisitions the Company made during the period. Selling, general and administrative expenses were primarily made up of the following for the nine months ended September 30, 2014: payroll and related expenses, including employee benefits, in the amount of $3,195,556; facilities and office expense in the amount of $364,137; consulting and professional fees in the amount of $467,053; amortization and depreciation in the amount of $472,015; travel and entertainment expenses in the amount of $126,917;  insurance expense in the amount of $161,457; computer support expenses in the amount of $126,011; banking and credit card fees expenses in the amount of $137,340; taxes in the amount of $81,821; vehicle expense in the amount of $47,502; marketing costs in the amount of $37,795; advertising in the amount of $82,711; and bad debt expense in the amount of $25,316.  We expect our selling, general, and administrative expenses to increase for the remainder of 2014 compared to the prior yearwas primarily due to the acquisitionscosts associated with The Fresh Diet, which the Company has completed.acquired effective August 15, 2014.

Other Income

Other income increased by $45,495 to $45,495was $0 during the ninethree months ended September 30, 2014March 31, 2015 compared to $0$20,000 for the ninethree months ended September 30, 2013.  The increase in other incomeMarch 31, 2014, which was due to gains on the sale of property and equipment in the amount of $24,495, and the adjustment of the contingent liability due to The Haley Group, LLC pursuant to the terms of the Haley acquisition.  There were no comparable transactions during the nine months ended September 30, 2013.
 
 
25
 
Interest expense

Interest expense, net of interest income, decreased by $760,326$155,024 or approximately 52.5%54.1% to $687,785$131,770  during the ninethree months ended September 30, 2014,March 31, 2015, compared to $1,448,111$286,794 during the ninethree months ended September 30, 2013.March 31, 2014.  Approximately 11.5%24.7% or $79,244$32,163 of the interest expense was accrued or paid interest on the company’s notes payable; approximately 88.5%75.3% or $608,541$99,157 of the interest expense was a non-cash interest expenseGAAP accounting charge associated with the amortization of the discounts on the Company’s notes payable.

Net incomeIncome attributable to variable interest entities

During the three months ended September 30, 2014,March 31, 2015, the Company recognized income of $39,653$1,544 from a variable interest entity acquired inas part of the acquisition of The Fresh Diet during the current period.  There was no such income or loss in the comparable period of the prior year.
 
Net (Loss) Income attributable to Innovative Food Holdings, Inc.
 
For the reasons above, the Company had a net incomeloss for the ninethree months ended September 30, 2014March 31, 2015 of $1,786,$2,015,110 which is an increase of $402,178$2,203,816 or approximately 1,167% compared to a net lossincome of $400,392$188,706 during the ninethree months ended September 30, 2013.March 31, 2014, although approximately  60.5%, of such loss was due to non-cash GAAP accounting charges including the amortization of the discount on deferred revenues acquired, non-cash compensation expense and amortization of discounted notes.     
 
Liquidity and Capital Resources
 
As of September 30, 2014,March 31, 2015, the Company had current assets of $7,289,572$6,954,080 consisting of cash and cash equivalents of $4,079,213,$3,211,491; trade accounts receivable of $1,165,410,$1,304,12; inventory of $1,231,299,$1,172,482; other current assets of $351,024,$804,745; and amountsamount due from related parties of $462,626.$461,241.  Also at September 30, 2014,March 31, 2015, the Company had current liabilities of $10,972,978,$13,398,814,  consisting of deferred revenue of $4,777,092; accounts payable of $2,845,962;and accrued liabilities of $1,650,762$4,944,665 (of which $178,150 is$462,045 was payable to related parties); deferred revenue of $3,961,634, revolving credit facilities of $897,222; accrued interest of $670,659$692,547 (of which $53,621 is$85,945 was payable to related parties); current portion of notes payable, net of discounts, of $209,339,$1,258,560; contingent liabilities of $448,750;$546,250; and current portion of notes payable to– related parties of $110,500.  In addition, current liabilities included a deferred tax liability of $1,069,200, which is related to intangible assets acquired in The Fresh Diet transaction.  The deferred tax liability  may be adjusted based on the value of assets but does not affect the Company’s current profitability or current cash obligations.
 
During the ninethree months ended September  30, 2014,March 31, 2015, the Company generatedused  cash from operating activities in the amount of $1,058,202.$950,838.    This consisted of the Company’s net incomeloss of $1,786,$(2,016,654)  offset by non-cash charges for the amortization of discount on notes payable of $608,541;$99,157; depreciation and amortization of $503,650; non-cash$295,742; and stock based compensation in the amount of $160,855;$759,603.   The Company’s cash position also increased by $88,686  as a result of changes in the components of current assets and increase in allowance for doubtful accounts of $25,316.current liabilities. 
 
The Company had cash generated  byused in  investing activities of $122,299$3,018,530 for the ninethree months ended September 30, 2014,March 31, 2015, which consisted primarily of $277,885$3,000,000 cash receivedpaid to re-acquire shares originally issued in the acquisition of The Fresh Diet acquisition, and $51,933 cash from the sale of property and equipment, offset by $104,000$18,530 for the purchase of investments, $100,000 for the acquisition of Organic Food Brokers,property and $3,519 for the acquisition of equipment.

The Company had cash generated by financing activities of $825,107$4,068,333 for the ninethree months ended September 30, 2014,March 31, 2015, which consisted of $1,835,000 in cash received$4,288,596 from the sale of common stock and $415,200 from the exercise of warrants, offset by $949,893$360,870 of payments (net of borrowings) on revolving credit facilities; and principal payments on notes payable and capital leases and  $60,000 forof $274,592 (including $166,667 on the purchase of treasury stock.Fifth Third Bank Term Loan).

The Company had net working capital deficit of ($3,683,406)$6,444,734 as of September 30, 2014.March 31, 2015.  We have generated positive cash flow from operations during the years ended December 31, 20132014 and 2013. In addition, the Company’s auditors previously 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 12 to the financial statements included in this report. As we seek to increase our sales of new items and enter new markets, acquire new businesses 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. 
 
26

On March 6, 2015 we completed a round of financing of $3,078,998 through the sale of 3,178,420 restricted shares of our common stock at a price per share of $0.9646, primarily for the purpose of acquiring, in a block sale, the shares of Monolith Ventures Ltd, a former shareholder of The Fresh Diet, who agreed to sell its position of approximately 3 million shares at a price of $0.9646 per share. Concurrently, Monolith Ventures Ltd. dismissed its previously reported litigation against the Company and exchanged mutual releases with the Company.  Simultaneously, the Company also raised an additional $1,209,596 through the sale of 943,829 restricted shares of the Company’s common stock at a price per share of $1.30.  Approximately 2.1 Million shares are subject to a one year lock up.  No warrants or other convertible securities were involved in the financing and the financing was completed by officers of the Company without requiring the services of a placement agent.  The financing was an exempt private placement under Regulation D with offers and sales made only to “accredited investors” without the use of public advertising.
In March 2015, warrants to purchase 727,272 shares of the Company’s common stock were exercised for cash of $400,000.
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 its growth.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.
 
26

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. 
2015 Plans
During 2015, 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 specialty foods markets in both the consumer and foodservice sector, exploring potential acquisition opportunities and continuing to extend our focus from a mainly wholesale foodservice business directed towards chefs to expanding sales and market opportunities  in the direct to consumer specialty food market through the growth of The Fresh Diet’s existing sales channels and 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 and consumer 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.
 
RISK FACTORS

The Company’s business and success is subject to numerous risk factors as detailed in its Annual Report on Form 10-K for the year ended December 31, 20132014 which is available at no cost at www.sec.gov.
 
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ITEM 4 - CONTROLS AND PROCEDURES

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit pursuant to the requirements of the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, among other things, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
 
(a) Evaluation of disclosure controls and procedures
 
Our Principal Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report, have concluded that as of that date, our disclosure controls and procedures were adequate and effective to ensure that information required to be disclosed by us in the reports we file or submit with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The conclusions notwithstanding, you are advised that no system is foolproof.
 
(b) Changes in internal control over financial reporting
 
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) and 15d-15 that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  

 
2728

PART II.  OTHER INFORMATION
 
Item 1.1. Legal Proceedings
 
None.
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

On June 1, 2012, nine persons, on behalf of themselves and others similarly situated, filed a Collective and Class Action Complaint in the New York Federal District Court, Southern District, against Late Night Express Courier Services, Inc. (FL) (“LNE”) and The Fresh Diet Inc. (“The Fresh Diet”) and certain individuals entitled Hernandez, et al. v. The Fresh Diet Inc., et al., Case No. 12 CV 4339.  On or about October 26, 2012, Plaintiffs filed an Amended Complaint (“Complaint”) adding additional individual Defendants.  The Complaint seeks to recover alleged unpaid overtime wages on behalf of drivers for LNE who delivered meals to The Fresh Diet customers in the tri-state area.  In an opinion dated September 29, 2014 (“Opinion”), the District Court Judge denied the Plaintiffs’ motion for Summary Judgment which sought a holding that all the Plaintiffs were employees of Defendants, as was Defendants’ cross-motion for Summary Judgment seeking a holding that Plaintiffs were independent contractors, the Court finding that there were questions of fact that could not be resolved on motions.  In addition, the Plaintiffs’ motion to certify a class of 109 drivers was denied.  In the same Opinion, Defendants’ motion to decertify the case from 29 potential opt-in Plaintiffs down to the 9 named Plaintiffs was granted, and the possible claims of the remaining 20 were dismissed without prejudice.   On or about February 24, 2015, a second action was filed in the New York Federal District Court, Southern District, on behalf of 6 (of the 20) additional driver-Plaintiffs entitled Hernandez, et al. v. The Fresh Diet Inc., et al. 15 CV 1338, containing essentially the same allegations, and adding the Company as a party defendant because of its acquisition of LNE.  In addition, two of the Plaintiffs from the Complaint also joined the second lawsuit asserting claims for retaliation.  The two cases were assigned to the same Federal Judge (since they are related), but were not consolidated for discovery or trial.  Prior to the second action and on January 21, 2015, the parties appeared before Federal Magistrate Judge Cott for mediation.  The Magistrate Judge did not succeed in settling the case.  On March 17, 2015, the Federal Judge stayed both cases, and referred both of them to the Court’s mediation program for further mediation within 60 days.  The Company believes that mediation may lead to a global settlement with all existing Plaintiffs.  With respect to the second instituted litigation, inasmuch as the litigation is in its early phase and discovery has not commenced it is too speculative to predict an outcome.  However, we believe we will have available to us many of the same defenses as in the first litigation and therefore do not believe that our exposure, if any at all, will likely exceed the amount of the first litigation, even if additional persons file claims.  Accordingly, given the uncertainty of both of these cases and given the additional Plaintiffs in the second action, the Company has recorded a contingent liability of $400,000 representing the estimated potential amounts payable in the litigations, even though it is possible that the amount of liability or settlement may actually be less than the reserved amount.

On September 3, 2014 the Company’s subsidiary was served a complaint by Monolith Ventures, Ltd., in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida (the “Monolith Complaint”). The Monolith Complaint, which was brought by a shareholder of less than 24% of the outstanding shares of The Fresh Diet sought to attack the registrant’s then recently concluded acquisition of The Fresh Diet which was approved by a majority of The Fresh Diet shareholders.  The action has been settled and the lawsuit discontinued with the exchange of general releases.
 
Item 2.2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
Item 3.3. Defaults Upon Senior Securities
 
None.
 
Item 4.4. Mine Safety Disclosures.
 
Not applicable.
 
Item 5.5. Other Information
 
None.
 
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10.1 Agreement and Plan of Merger Among Innovative Food Holdings, Inc., The Fresh Diet, Inc., and FD Acquisition CorpItem
10.2 Summary of amended terms of Employment Agreement for certain Executive Officers6. Exhibits
 
31.1 Section 302 Certification
 
31.2 Section 302 Certification
 
32.1 Section 906 Certification
 
32.2 Section 906 Certification
 
101.INS XBRL Instance Document
 
101.SCH XBRL Taxonomy Extension Schema
 
101.CAL XBRL Taxonomy Extension Calculation Linkbase
 
101.DEF XBRL Taxonomy Extension Definition Linkbase
 
101.LAB XBRL Taxonomy Extension Label Linkbase
 
101.PRE  XBRL Taxonomy Extension Presentation Linkbase
 
 
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SIGSIGNATURESNATURES

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

SIGNATURE TITLE DATE
     
/s/ Sam Klepfish                                    Chief Executive Officer November 18, 2014May 11, 2015
Sam Klepfish    
     
/s/ John McDonald                                 Principal Financial Officer November 18, 2014May 11, 2015
John McDonald    
 


 
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