INNOVATIVE FOOD HOLDINGS INC - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x Annual report pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal
year ended December 31, 2008
OR
o Transition report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
COMMISSION FILE NUMBER: 0-9376
INNOVATIVE
FOOD HOLDINGS, INC.
(Name of
Registrant as Specified in its Charter)
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FLORIDA
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20-116776
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification
No.)
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3845 Beck Blvd., Suite 805 Naples,
Florida
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34114
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(239)
596-0204
(Registrant's
Telephone Number, Including Area Code)
SECURITIES
REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES
REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.0001 PAR VALUE
PER SHARE
(Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. o
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
Indicate
by a check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer and
smaller reporting company” in Rule 12b-2 of the Exchange Act. (check
one):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o (Do not
check if a smaller reporting company)
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Smaller
reporting company x
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Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No x
The
aggregate market value of the voting and non-voting stock held by non-affiliates
was approximately $330,718 as of April 10, 2009, based upon a closing
price of $0.0025 for the issuer's common stock on such
date.
On April
10, 2009, 178,577,038 shares of our common stock were outstanding.
INNOVATIVE FOOD HOLDINGS, INC.
INDEX
TO ANNUAL REPORT ON FORM 10-K
FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008
ITEMS
IN FORM 10-K
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PART
I
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PAGE
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Item
1.
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2
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Item
2.
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7
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Item
3.
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7
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Item
4.
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7
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PART
II
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Item
5.
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8
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Item
6.
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9
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Item
7.
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9
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Item
8.
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17
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Item
9.
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46
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Item
9A.
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46
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Item
9B.
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46
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PART
III
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Item
10.
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47
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Item
11.
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49
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Item
12.
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51
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Item
13.
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52
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Item
14.
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52
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Item
15.
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53
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54
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FORWARD
LOOKING INFORMATION
MAY
PROVE INACCURATE
THIS
ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND
INFORMATION RELATING TO US THAT ARE BASED ON THE BELIEFS OF MANAGEMENT, AS WELL
AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO US. WHEN USED IN
THIS DOCUMENT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," “SHOULD,” AND
"EXPECT" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO US, ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT OUR CURRENT VIEWS WITH
RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND
ASSUMPTIONS, INCLUDING THOSE DESCRIBED IN THIS ANNUAL REPORT ON FORM 10-K.
SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM
THOSE DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED OR EXPECTED. WE DO
NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
PART
I
ITEM 1. Business
Our
History
We were
initially formed in June 1979 as Alpha Solarco Inc., a Colorado corporation.
From June 1979 through February 2003, we were either inactive or involved in
discontinued business ventures. We changed our name to Fiber Application Systems
Technology, Ltd in February 2003. In January 2004, we changed our state of
incorporation by merging into Innovative Food Holdings, Inc. (IVFH), a Florida
corporation formed for that purpose. As a result of the merger we changed our
name to that of Innovative Food Holdings, Inc. In January 2004 we also acquired
Food Innovations, Inc., a Delaware corporation, for 25,000,000
shares of our common stock.
Our
Operations
Our
business is currently conducted by our subsidiary, Food Innovations, Inc.
(“FII”), which was incorporated in the state of Delaware on January 9, 2002.
Since its incorporation our subsidiary has been in the business of providing
premium restaurants with the freshest origin-specific perishables and specialty
products shipped directly from our network of vendors within 24
– 72 hours. Our customers include restaurants, hotels, country clubs,
national chain accounts, casinos, and catering houses. In our
business model, we take orders from our customers and then forward the orders to
our various suppliers for fulfillment. In order to preserve
freshness, we do not warehouse or store our products, thereby significantly
reducing our overhead. Rather, we carefully select our suppliers
based upon, among other factors, their reliability and access to overnight
courier services.
Our
Products
We
distribute over 3,000 perishable and specialty food products, including
origin-specific seafood, domestic and imported meats, exotic game and poultry,
artisanal cheeses, caviar, wild and cultivated mushrooms, micro-greens, heirloom
and baby produce, organic farmed and manufactured food products, estate-bottled
olive oils and aged vinegars. We are constantly adding other products that food
distributors cannot effectively warehouse, including organic products and
specialty grocery items. We offer our customers access to the best food products
available nationwide, quickly and cost-effectively. Some of our best-selling
items include:
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Seafood - Alaskan
wild king salmon, Hawaiian sashimi-grade ahi tuna, Gulf of Mexico day-boat
snapper, Chesapeake Bay soft shell crabs, New England live lobsters,
Japanese hamachi
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Meat & Game -
Prime rib of American kurobuta pork, dry-aged buffalo tenderloin, domestic
lamb, Cervena venison, elk
tenderloin
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Produce - White
asparagus, baby carrot tri-color mix, Oregon wild ramps, heirloom
tomatoes
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Poultry - Grade A
foie gras, Hudson Valley quail, free range and organic chicken, airline
breast of pheasant
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Specialty -
Truffle oils, fennel pollen, prosciutto di Parma, wild boar
sausage
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Mushrooms -
Fresh morels, Trumpet Royale, porcini powder, wild golden
chanterelles
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Cheese - Maytag
blue, buffalo mozzarella, Spanish manchego, Italian gorgonzola
dolce
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In 2008
seafood accounted for 14% of sales, meat and game accounted for
21% of sales, specialty items accounted for 43% of
sales, produce accounted for 5% of sales, cheese accounted for 13% of
sales, and poultry accounted for 4% of sales.
Customer
Service and Logistics
Our
“live” chef-driven customer service department is available by telephone every
weekday, from 7 a.m. to 7 p.m., Florida time. The team is made up of four chefs
who are full-time employees of the Company, and who are experienced in all
aspects of perishable and specialty products. By employing chefs to handle
customer service, we are able to provide our customers with extensive
information about our products, including:
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Flavor
profile and eating qualities
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Recipe
and usage ideas
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Origin,
seasonality, and availability
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Cross
utilization ideas and complementary uses of
products
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Our
logistics team tracks every package to ensure timely delivery of products to our
customers. The logistics manager receives tracking information on all products
ordered, and packages are monitored from origin to delivery. In the event that
delivery service is interrupted, our logistics department begins the process of
expediting the package to its destination. The customer is then contacted before
the expected delivery commitment time allowing the customer ample time to make
arrangements for product replacement or menu changes. Our logistics manager
works directly with our vendors to ensure our strict packaging requirements are
in place at all times.
Relationship
with U.S. Foodservice
In 2003,
Next Day Gourmet, L.P., a subsidiary of USF, a $20 Billion broadline distributor
then owned by Dutch grocer Royal Ahold, contracted FII to handle the
distribution of over 3,000 perishable and specialty products. Under the current
terms of the contract FII is the exclusive supplier of overnight delivered,
perishable sea foods, fresh produce, and other exotic fresh foods. Such products
are difficult for broadline food distributors to manage profitably and keep in
warehouse stock due to their perishable nature and high-end limited customer
base. Through USF’s sales associates, FII’s products are available to USF
accounts nationwide, ensuring superior freshness and extended shelf life to
their customers. The current contract with USF expires on September
11, 2009, During the years ended December 31, 2008, and 2007, sales
through USF’s sales associates accounted for 97% and 95%
of total sales respectively. We believe that although a
significant portion of our sales occur 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 Next Day Gourmet, L.P.
Growth
Strategy
Restaurant
food sales continue to grow, both in total dollars spent (from $295 billion in
1995 to over $565 billion projected for 2009) and
projected to equal 4% of the U.S. gross domestic product. On a typical day
in America in 2009, more than 130 million individuals will be projected to be
foodservice patrons , according to the National Restaurant Association
website (www.restaurant.org).
For our
continued growth within the foodservice industry we rely heavily on the
availability to our customers of our chefs' culinary skills, a high
level of personal customer service, premium quality products, and sales
available through our relationship with USF.
We
anticipate attempting to grow our current business both through increased sales
of products to our existing foodservice customers, increasing our foodservice
customer base, and through the entry into additional markets such as the direct
to consumer market through a variety of potential sales channels, and sales
partnerships.
In
addition to attempting to grow our current business, we believe that there are
lateral opportunities in the food industry generally and such we may
look into the possibility of acquiring a gourmet food manufacturer or
gourmet distributor at some future point in time. We have no specific plans at
this point, nor do we know how we would finance any such acquisition. We
anticipate that, given our current cash flow situation, any acquisition would
involve the issuance of additional shares of our common stock. No acquisition
will be consummated without thorough due diligence. No assurance can be given
that we will be able to identify and successfully conclude negotiations with any
potential target.
General
economic conditions and consumer confidence can affect the frequency of
purchases and amounts spent by consumers for food-prepared-away-from-home and,
in turn, can impact our customers and our sales. We believe the current general
economic conditions, including pressure on consumer disposable income, may
contribute to a decline in the foodservice market. We intend to
continue our efforts to expand our market share and grow earnings by focusing on
sales growth, margin management, productivity gains and supply chain management
And product and service differentiation.
Competition
While we
face intense competition in the marketing of our products and services, it is
our belief that there is no other single company in the United States that
offers such a broad range of customer service oriented quality chef driven
perishables for delivery in 24 to 72 hours. Our primary competition is from
local meat and seafood purveyors that supply a limited local market and have a
limited range of products. However, many purveyors are well established, have
reputations for success in the development and marketing of these types of
products and services and have significantly greater financial, marketing,
distribution, personnel and other resources. These financial and other
capabilities permit such companies to implement extensive advertising and
promotional campaigns, both generally and in response to efforts by additional
competitors such as us, to enter into new markets and introduce new products and
services.
Insurance
We
maintain a general liability insurance policy with a per occurrence limit of
$1,000,000 and aggregate policy covering $2,000,000 of liability. In addition,
we have non-owned automobile personal injury coverage with a limit of
$1,000,000. Such insurance may not be sufficient to cover all potential claims
against us and additional insurance may not be available in the future at
reasonable costs.
Government
Regulation
Various
federal and state laws currently exist, and more are sure to be adopted,
regulating the delivery of fresh food products. However, our business plan does
not require us to deliver fresh food products directly, as third-party vendors
ship the products directly to our customers. We require all third-party vendors
to maintain $2,000,000 liability insurance coverage and compliance with Hazard
Analysis and Critical Control Point (HACCP), an FDA- and USDA-mandated food
safety program. Any changes in the government regulation of delivering of fresh
food products that hinders our current ability and/or cost to deliver fresh
products, could adversely impact our net revenues and gross margins and,
therefore, our profitability and cash flows could also be adversely
affected.
Employees
We
currently employ 14 full-time employees, including 4 chefs and 2 executive
officers. We believe that our relations with our employees are satisfactory.
None of our employees are represented by a union.
Transactions
with Major Customers
Transactions
with major customers and related economic dependence information is set forth
under the heading Transactions with Major Customers in Note 14 to the
Consolidated Financial Statements included in the Financial Statements section
hereof and is incorporated herein by reference.
How
to Contact Us
Our
executive offices are located at 3845 Beck Blvd., Naples, Florida
34109; our Internet address is www.foodinno.com; and our telephone number
is (239) 596-0204.
Risk
Factors
We
Have a History Of Losses Which May Continue, Requiring Us To Seek Additional
Sources of Capital Which May Not Be Available, Requiring Us To Curtail Or Cease
Operations.
We
suffered a net loss of $2,421,122 for the year ended December
31, 2008. We cannot assure you that we can achieve or sustain profitability
on a quarterly or annual basis in the future. If revenues grow more slowly than
we anticipate, or if operating expenses exceed our expectations or cannot be
adjusted accordingly, we will incur losses. We will also incur losses
if the fair value of warrants, options, etc changes unfavorably. We will incur
operating losses until we are able to establish significant sales. Our
possible success is dependent upon the successful development and marketing of
our services and products, as to which we can give no assurance. Any future
success that we might enjoy will depend upon many factors, including factors out
of our control or which cannot be predicted at this time. These factors may
include changes in or increased levels of competition, including the entry of
additional competitors and increased success by existing competitors, changes in
general economic conditions, increases in operating costs, including costs of
supplies, personnel, marketing and promotions, reduced margins caused by
competitive pressures and other factors. These conditions may have a materially
adverse effect upon us or may force us to reduce or curtail operations. In
addition, we will require additional funds to sustain and expand our sales and
marketing activities, particularly if a well-financed competitor emerges. We can
give no assurance that financing will be available in amounts or on terms
acceptable to us, if at all. Our inability to obtain sufficient funds from our
operations or external sources would require us to curtail or cease
operations.
If
We Are Unable to Obtain Additional Funding Our Business Operations Will be
Harmed and If We Do Obtain Additional Financing Our Then Existing Shareholders
May Suffer Substantial Dilution.
Additional
capital will be required to effectively support our operations and to otherwise
implement our overall business strategy. However, we can give no assurance that
financing will be available when needed on terms that are acceptable to us. Our
inability to obtain additional capital will restrict our ability to grow and may
reduce our ability to continue to conduct business operations. If we are unable
to obtain additional financing, we will likely be required to curtail our
marketing and development plans and possibly cease our operations. Any
additional equity financing (or equity related financing such as convertible
debt financing) may involve substantial dilution to our then existing
shareholders.
Our
Independent Auditors Have Expressed Substantial Doubt About Our Ability to
Continue As a Going Concern, and We Concur With This Assessment
In their
report dated April 7, 2009, our independent auditors stated that our
financial statements for the year ended December 31, 2008 were
prepared assuming that we would continue as a going concern. Our ability to
continue as a going concern is an issue raised as a result of our significant
losses from operations since inception and our working capital deficiency. We
continue to experience net operating losses. Our ability to continue as a going
concern is subject to our ability to generate a profit and/or obtain necessary
funding from outside sources, including obtaining additional funding from the
sale of our securities, increasing sales or obtaining loans and grants from
various financial institutions where possible. Our continued net operating
losses increase the difficulty in our meeting such goals and we can give no
assurance that such methods will prove successful.
We
Have Historically Derived Substantially All of Our Revenue From One Client and
if We Were to Lose Such Client and Be Unable to Generate New Sales to
Offset Such Loss, We May Be Forced to Cease or Curtail Our
Operations.
In 2003,
Next Day Gourmet, L.P. initially contracted with our subsidiary to handle the
distribution of over 3,000 perishable and specialty food products to customers
of US Food Services, Inc. (“USF”). Our current contract with USF
expires in September 2009. Our sales through USF’s sales force generated gross
revenues for us of $6,791,767 in the year ended December 31,
2008, and $6,519,721 in the year ended December 31, 2007. Those
amounts contributed 97% and 95%, respectively of our
total sales in those periods. Our sales efforts are for the most part dependent
upon the efforts of the USF sales force. Although we have generated
revenues from additional customers other than USF, if our relationship with USF
were to be materially changed and we are unable to generate new sales
to offset such loss, we may be forced to cease or curtail our
operations.
We
May Be Unable to Manage Our Growth Which Could Result in Our Being Unable to
Maintain Our Operations.
Our
strategy for growth is focused on continued enhancements and expansion to our
existing business model, offering a broader range of services and products and
affiliating with additional vendors and through possible joint ventures.
Pursuing this strategy presents a variety of challenges. We may not experience
an increase in our services to our existing customers, and we may not be able to
achieve the economies of scale, or provide the business, administrative and
financial services, required to sustain profitability from servicing our
existing and future customer base. Should we be successful in our expansion
efforts, the expansion of our business would place further demands on our
management, operational capacity and financial resources. To a significant
extent, our future success will be dependent upon our ability to maintain
adequate financial controls and reporting systems to manage a larger operation
and to obtain additional capital upon favorable terms We can give no assurance
that we will be able to successfully implement our planned expansion, finance
its growth, or manage the resulting larger operations. In addition, we can give
no assurance that our current systems, procedures or controls will be adequate
to support any expansion of our operations. Our failure to manage our growth
effectively could have a material adverse effect on our business, financial
condition and results of operations.
The
Foodservice Industry is Very Competitive, Which May Result in Decreased Revenue
for Us as Well as Increased Expenses Associated With Marketing Our Services and
Products.
We
compete against other providers of quality foods, some of which sell their
services globally, and some of these providers have considerably greater
resources and abilities than we have. These competitors may have greater
marketing and sales capacity, established distribution networks, significant
goodwill and global name recognition. Furthermore, it may become necessary for
us to reduce our prices in response to competition. This could impact our
ability to be profitable.
Our
Success Depends on Our Acceptance by the Chef Community and if the Chef
Community Does Not Accept Our Products Then Our Revenue Will be Severely
Limited.
The chef
community may not embrace our products. Acceptance of our services will depend
on several factors, including: cost, product freshness, convenience, timeliness,
strategic partnerships and reliability. Any of these factors could have a
material adverse effect on our business, results of operations and financial
condition. We also cannot be sure that our business model will gain wide
acceptance among chefs. If the market fails to continue to develop, or develops
more slowly than we expect, our business, results of operations and financial
condition will be adversely affected.
We
Rely Upon Outside Vendors and Shippers for Our Specialty Food Products and
Interruption in the Supply of Our Products May Negatively Impact Our
Revenues.
Shortages
in supplies of the food products we sell may impair our ability to provide our
services. Our vendors are independent and we cannot guarantee their future
ability to source the products that we sell. Many of our products are
wild-caught, and we cannot guarantee their availability in the future.
Unforeseen strikes and labor disputes as well as adverse weather conditions may
result in our inability to deliver our products in a timely manner. Since our
customers rely on us to deliver their orders within 24-72 hours, delivery delays
could significantly harm our business.
We
Are and May Be Subject to Regulatory Compliance and Legal
Uncertainties.
Changes
in government regulation and supervision or proposed Department of Agriculture
reforms could impair our sources of revenue and limit our ability to expand our
business. In the event any future laws or regulations are enacted which apply to
us, we may have to expend funds and/or alter our operations to insure
compliance.
Health
Concerns Could Affect Our Success.
We
require our vendors to produce current certification that the vendor is
H.A.C.C.P. compliant, and a current copy of their certificate of liability
insurance. However, unforeseen health issues concerning food may adversely
affect our sales and our ability to continue operating our
business.
The
Issuance of Shares Upon Conversion of Convertible Notes and Exercise of
Outstanding Warrants May Cause Immediate and Substantial Dilution to Our
Existing Stockholders.
The
issuance of shares upon conversion of convertible notes and exercise of warrants
may result in substantial dilution to the interests of other stockholders since
the note/warrant holders may ultimately convert or exercise and sell the full
amount of shares issuable on conversion / exercise. Although, for the most part,
such note/warrant holders may not convert their convertible notes and/or
exercise their warrants if such conversion or exercise would cause them to own
more than 4.99% of our outstanding common stock unless waived in writing by the
investor with 61 day notice to the Company, this restriction does not
prevent them from converting and/or exercising some of their holdings, selling
off those shares, and then converting the rest of their holdings. In this way,
they could sell more than this limit while never holding more than this limit.
We anticipate that eventually, over time, the full amount of the convertible
notes will be converted into shares of our common stock, in accordance with the
terms of the secured convertible notes.
If
We Are Required for any Reason to Repay Our Outstanding Convertible Notes We
Would Be Required to Deplete Our Working Capital, If Available, or Raise
Additional Funds.
We are
required to repay our convertible notes commencing in June 2009 with respect to
the convertible notes issued in connection with the December 2008 Securities
Purchase Agreement. If we are required to repay the secured convertible notes,
we would be required to use our limited working capital and/or raise additional
funds (which may be unavailable) which would have the effect of causing further
dilution and lowering shareholder value.
We
Have a History of Being In Default Under Certain Convertible Notes Which Could
Result in Legal Action Against Us, Which Could Require the Sale of Substantial
Assets.
While we
are not currently in default under any of our outstanding notes, we have a
history of being in default under certain of our outstanding convertible notes,
and possibly will be again in the future, which could require the early
repayment of the convertible notes, including a default interest rate of 15% on
the outstanding principal balance of the notes if the default is acted upon by
the note holders and not cured within the specified grace period. If we were
unable to repay the notes when required, the note holders could commence legal
action against us and foreclose on all of our assets to recover the amounts due.
Any such action would require us to curtail or cease operations.
Our
Revenues Can be Affected by Price Increases Imposed by our
Carriers.
We
deliver our products to our customers through third party overnight or express
delivery carriers. If the carriers we use raise their shipping rates
or add surcharges such as fuel surcharges and other charges, we will
either have to absorb the increased costs which will put pressure
on our bottom line or pass on the cost to our customers which may
result in reduced sales if our customers are unwilling to pay the higher
prices. Either way, such an increase in shipping
costs will likely have a negative impact on our results of
operations.
Our
Common Stock is Subject to the "Penny Stock" Rules of the SEC and the Trading
Market in Our Securities is Limited, Which Makes Transactions in Our Stock
Cumbersome and May Reduce the Value of an Investment in Our Stock.
The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share (post-reverse
split) or with an exercise price of less than $5.00 per share (post-reverse
split), subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require:
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that
a broker or dealer approve a person's account for transactions in penny
stocks; and
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the
broker or dealer receives from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
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In order
to approve a person's account for transactions in penny stocks, the broker or
dealer must:
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obtain
financial information and investment experience objectives of the person;
and
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make
a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
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The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:
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sets
forth the basis on which the broker or dealer made the suitability
determination; and
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that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
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Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
Generally,
brokers may be less willing to execute transactions in securities subject to the
"penny stock" rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.
ITEM 2. Properties
On
October 17, 2008, we entered into a three-year lease with Grand Cypress
Communities, Inc. for new premises consisting of 4,000 square feet at 3845 Beck
Blvd., Naples, Florida. The commencement date of the lease
is January 1, 2009. The annual rent and fees under the lease is
approximately $54,000. The lease provides for a buyout option at the
end of the lease with credit towards the purchase price received for the rental
payments made during the term of the lease
ITEM 3. Legal Proceedings
In
September 2006 we commenced an action in New York Supreme Court, Nassau County,
against Pasta Italiana, Inc. Robert Yandolino and Lloyd Braider (collectively
“Pasta”) to collect on outstanding promissory notes
totaling $360,000 (plus interest and
collection expenses) of which $65,000 was personally guaranteed by
the two individual defendants. The
defendants counterclaimed for an unspecified amount of damages due to
our alleged breach of an agreement to purchase the corporate
defendant.
On
September 5, 2008, we reached a settlement agreement with Pasta. The
settlement agreement (the “Pasta Settlement Agreement”) calls
for Pasta to pay to the Company $165,000 of the principal amount of
the note. Pasta is to make 36 monthly payments
in the amount of $4,500 beginning in September, 2008 and a final
payment of $3,000 The first of these 36 payments was received by the
Company during the third quarter of 2008. Upon execution
of the agreement, Pasta was also obligated to deliver to the Company
10% of its fully diluted common stock. This stock is valued at $0 in
the Company’s financial statements for the period ended September 30,
2008. The Company was obligated to deliver to
Pasta 1,500,000 shares of its common stock (valued at $9,000 at September 5,
2008) and warrants to purchase an additional 1,000,000 shares of common stock at
a price of $0.012 ( valued at $5,977 at September 5, 2008). The
Company recorded an impairment charge in the amount of
$142,124 during the three months ended September 30, 2008,
representing the difference between the net book value of the Pasta receivable
prior to the Pasta Settlement Agreement and the amount of the new note
receivable negotiated in the Pasta Settlement Agreement, plus the value of the
Company’s common stock and warrants provided to Pasta.
Interest
will accrue at a rate of 8% on the unpaid portion of the
$165,000. The accrued interest is to be paid semi-annually in
shares of common stock of Pasta (the “Pasta Interest
Shares”). The Pasta Interest Shares are valued at $0 in
the financial statements of the Company, and no interest income is recorded by
the Company for these shares during the three months ended September
30, 2008.
Pasta
made several payments required by the settlement agreement, totaling
$19,000. Thereafter, Pasta defaulted on the next
payment, and failed to cure its default within the required time period after a
Notice of Default was sent to it. We are continuing discussions with
Pasta in regards to resuming payments and continue examine all legal remedies
available to us to insure compliance with the agreement. We intend to cost
affectively pursue the monies owed to us under the Pasta Settlement
Agreement
ITEM 4. Submission of Matters to a Vote of Security
Holders
None.
PART
II
ITEM 5. Market For Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
Market
Information
Prices
for our common stock are quoted in the Pink Sheets. Since March 2004, our common
stock has traded under the symbol "IVFH". Prior thereto, our common stock traded
under the symbol "FBSN". 173,577,038 shares of common
stock were outstanding as of December 31, 2008. The following table sets forth
the high and low closing sales prices of our common stock as reported
in the Pink Sheets for each full quarterly period within the two most recent
fiscal years.
|
Fiscal
Year Ending December 31, 2008
|
HIGH
|
LOW
|
|||||
|
First
Quarter
|
$
|
0.008
|
$
|
0.003
|
|||
|
Second
Quarter
|
0.008
|
0.00304
|
|||||
|
Third
Quarter
|
0.008
|
0.003
|
|||||
|
Fourth
Quarter
|
0.0015
|
0.001
|
|||||
|
Fiscal
Year Ending December 31, 2007
|
|||||||
|
First
Quarter
|
$ | 0.005 | $ | 0.002 | |||
|
Second
Quarter
|
0.004 | 0.002 | |||||
|
Third
Quarter
|
0.005 | 0.002 | |||||
|
Fourth
Quarter
|
0.008 | 0.002 | |||||
The
quotations listed above reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. On April
10, 2009 the closing price of our common stock as reported by the OTC Bulleting
Board was $0.0025.
Security
Holders
On
December 31, 2008, there were approximately 5,200 record holders of our
common stock. In addition, we believe there are numerous beneficial owners of
our common stock whose shares are held in "street name."
Dividends
We have
not paid dividends during the three most recently completed fiscal years, and
have no current plans to pay dividends on our common stock. We currently intend
to retain all earnings, if any, for use in our business.
Recent Sales and Other Issuances of
Our Equity Securities
During
the twelve months ended December 31, 2008, the Company had the
following transactions:
The
Company issued 1,789,400 shares of common stock for the conversion of notes
payable and accrued interest in the amount of $8,947.
All of
the issuances described above were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933 for the following reasons: (1)
none of the issuances involved a public offering or public advertising of the
payment of any commissions or fees; (2) the issuances for cash were to
“accredited investors” (3) the issuances upon conversion of notes were for
notes held at least 12 months and did not involve the payment of any other
considerations; and (4) all issuances to affiliates and to non-affiliates
holding the securities for less than 1 year carried restrictive
legends.
Derivative
Securities Currently Outstanding
As of
December 31, 2008 and 2007, the Company has issued convertible notes payable in
the aggregate principal amount of $1,465,000 and $1,126,000 , respectively, with
accrued interest of $614,484 and $458,679 , respectively,
which, if converted to common stock, will result in our issuance of
approximately 395,043,320 and 298,168,520 shares ,
respectively, of common stock at conversion rates ranging from $0.005 to $0.010
per share.
The
Company has warrants to purchase an additional 273,200,000 and
189,000,000 shares of common stock at December
31, 2008 and 2007, respectively. The Company also has outstanding
options to purchase an additional 35,500,000 and 15,500,000
shares of common stock at December 31, 2008 and 2007,
respectively. The Company also has outstanding obligations to issue a
total of 110,280,000 additional shares of common stock at December 31, 2008 and
2007 pursuant to the terms of penalty agreements for failure to register shares
underlying certain convertible notes payable. The company does not
currently have sufficient shares of common stock authorized to satisfy these
additional issuances of shares.
Securities
Authorized for Issuance Under Equity Compensation Plans
We do not
currently have any equity compensation plans.
ITEM 6. Selected Financial Data
Not
Applicable.
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The
following discussion should be read in conjunction with the consolidated
financial statements and the related notes thereto, as well as all other related
notes, and financial and operational references, appearing elsewhere in this
document.
Certain
information contained in this discussion and elsewhere in this report may
include "forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, and is subject to the safe harbor
created by that act. The safe harbor created by the Securities Litigation Reform
Act will not apply to certain "forward looking statements” because we
issued "penny stock" (as defined in Section 3(a)(51) of the
Securities Exchange Act of 1934 and Rule 3a51-1 under
the Exchange Act) during the three year period
preceding the date(s) on which those forward looking statements were first made,
except to the extent otherwise specifically provided by
rule, regulation or order of the Securities and Exchange Commission.
We caution readers that certain important factors may affect our actual results
and could cause such results to differ materially from any forward-looking
statements which may be deemed to have been made in this Report or which are
otherwise made by or on behalf of us For this purpose, any statements contained
in this report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "will", "expect",
"believe", "explore", "consider", "anticipate", "intend",
"could", "estimate", "plan", "propose" or "continue" or the negative
variations of those words or comparable terminology are intended to identify
forward-looking statements. Factors that may affect our results include, but are
not limited to, the risks and uncertainties associated with:
|
●
|
Our
ability to raise capital necessary to sustain our anticipated operations
and implement our business plan,
|
|
●
|
Our
ability to implement our business
plan,
|
|
●
|
Our
ability to generate sufficient cash to pay our lenders and other
creditors,
|
|
●
|
Our
ability to employ and retain qualified management and
employees,
|
|
●
|
Our
dependence on the efforts and abilities of our current employees and
executive officers,
|
|
●
|
Changes in
government regulations that are applicable to our current or
anticipated business,
|
|
●
|
Changes
in the demand for our services,
|
|
●
|
The
degree and nature of our
competition,
|
|
●
|
The
lack of diversification of our business plan,
|
|
●
|
The
general volatility of the capital markets and the establishment of a
market for our shares, and
|
|
●
|
Disruption
in the economic and financial conditions primarily from the impact of past
terrorist attacks in the United States, threats of future attacks, police
and military activities overseas and other disruptive worldwide political
and economic events and
weather conditions.
|
We are
also subject to other risks detailed from time to time in our other Securities
and Exchange Commission filings and elsewhere in this report. Any one or more of
these uncertainties, risks and other influences could materially affect our
results of operations and whether forward-looking statements made by us
ultimately prove to be accurate. Our actual results, performance and
achievements could differ materially from those expressed or implied in these
forward-looking statements. We undertake no obligation to publicly
update or revise any forward-looking statements, whether from new information,
future events or otherwise.
Critical
Accounting Policy and Estimates
Use
of Estimates in the Preparation of Financial Statements
The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. These
estimates include certain assumptions related to doubtful accounts receivable,
stock-based services, valuation of financial instruments, and income taxes. On
an on-going basis, we evaluate these estimates, including those related to
revenue recognition and concentration of credit risk. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe our estimates
have not been materially inaccurate in past years, and our assumptions are not
likely to change in the foreseeable future.
On August
25, 2005, the Company entered into contracts which obligated the company under
certain circumstances to issue shares of common stock in excess of the number of
shares of common stock authorized. Under accounting guidance provided by EITF
00-19, effective August 25, 2005 the Company began to account for all derivative
financial instruments, including warrants, conversion features embedded in notes
payable, and stock options, via the liability method of accounting.
Accordingly, all these instruments are valued at issuance utilizing
the Black-Scholes valuation method, and are re-valued at each period ending
date, also using the Black-Scholes valuation method. Any gain or loss
from revaluation is charged to operations during the period.
(a)
Warrants:
The
Company values warrants using the Black-Scholes valuation
model. Warrants are valued upon issuance, and re-valued at each
financial statement reporting date. Any change in value is charged to
income or expense during the period. The following table illustrates
certain key information regarding our warrants and warrant valuation assumptions
at December 31, 2008 and 2007:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Number
of warrants outstanding
|
273,200,000 | 189,000,000 | ||||||
|
Value
at December 31
|
$ | 1,388,287 | $ | 431,188 | ||||
|
Number
of warrants issued during the year
|
84,200,000 | - | ||||||
|
Value
of warrants issued during the year
|
$ | 374,557 | $ | - | ||||
|
Revaluation
gain (loss) during the year
|
$ | (588,519 | ) | $ | (19,116 | ) | ||
|
Black-Scholes
model variables:
|
||||||||
|
Volatility
|
203.6% - 332.7 | % | 178.2% - 194.5 | % | ||||
|
Dividends
|
$ | 0 | $ | 0 | ||||
|
Risk-free
interest rates
|
0.27% - 2.41 | % | 3.49% - 5.06 | % | ||||
|
Term
(years)
|
1.15 - 5.00 | 2.15 - 4.13 | ||||||
b.)
Embedded conversion features of notes payable:
The
Company accounts for conversion options embedded in convertible notes in
accordance with SFAS No. 133 ‘‘Accounting for Derivative Instruments and Hedging
Activities’’ and EITF 00-19 ‘‘Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock.’’ SFAS 133
generally requires companies to bifurcate conversion options embedded in
convertible notes and preferred shares from their host instruments and to
account for them as free standing derivative financial instruments in accordance
with EITF 00-19.
The
Company values embedded conversion features utilizing the Black-Scholes
valuation model. Warrants are valued upon issuance, and re-valued at
each financial statement reporting date. Any change in value is
charged to income or expense during the period. The following table
illustrates certain key information regarding our warrants and warrant valuation
assumptions at December 31, 2008 and 2007:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Number
of shares potentially issuable for conversion
privileges outstanding
|
285,000,000 | 217,200,000 | ||||||
|
Value
at December 31
|
$ | 1,388,287 | $ | 431,188 | ||||
|
Number
of options issued during the year
|
69,400,000 | 42,800,000 | ||||||
|
Value
of options issued during the year
|
$ | 364,079 | $ | 166,640 | ||||
|
Number
of options exercised or underlying
|
||||||||
|
notes
paid during the year
|
1,600,000 | 32,000,000 | ||||||
|
Value
of options exercised or underlying
|
||||||||
|
notes
paid during the year
|
$ | 8,800 | $ | 149,747 | ||||
|
Revaluation
gain (loss) during the year
|
$ | (182,583 | ) | $ | 11,098 | |||
|
Black-Scholes
model variables:
|
||||||||
|
Volatility
|
193.7%
to 332.7%
|
146.4%
to194.5%
|
||||||
|
Dividends
|
0 | 0 | ||||||
|
Risk-free
interest rates
|
0.27% - 2.41 | % | 3.37% - 5.16 | % | ||||
|
Term
(years)
|
1.00 - 10.00 | 10.00 – 10.00 | ||||||
c.) Stock
options
The
Company accounts for options in accordance SFAS 123(R) Share Based
Payments”. Options are valued upon issuance, and re-valued at each
financial statement reporting date, utilizing the Black-Scholes valuation
model. Option expense is recognized over the requisite service
period of the related option award. Any change in value is charged to income or
expense during the period. The following table illustrates certain
key information regarding our options and option assumptions at December 31,
2008 and 2007:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Number
of options outstanding
|
35,500,000 | 15,500,000 | ||||||
|
Value
at December 31
|
$ | 174,691 | $ | 39,344 | ||||
|
Number
of options issued during the year
|
20,000,000 | - | ||||||
|
Value
of options issued during the year
|
$ | 138,262 | - | |||||
|
Number
of options recognized during the year
|
||||||||
|
pursuant
to SFAS 123(R)
|
20,100,000 | 100,000 | ||||||
|
Value
of options recognized during the year
|
||||||||
|
pursuant
to SFAS 123(R)
|
$ | 138,313.00 | $ | 37 | ||||
|
Revaluation
gain (loss) during the year
|
$ | 5,717 | $ | (1,623 | ) | |||
|
Black-Scholes
model variables:
|
||||||||
|
Volatility
|
203.7%
to 332.7%
|
178.3%
to 194.5%
|
||||||
|
Dividends
|
0 | 0 | ||||||
|
Risk-free
interest rates
|
0.27% - 2.41 | % | 3.09% - 5.06 | % | ||||
|
Term
(years)
|
0.37 - 5.00 | 1.38 - 4.64 | ||||||
Doubtful
Accounts Receivable
The
Company maintained an allowance in the amount of $15,877 for doubtful
accounts receivable at December 31, 2008, and $10,000 at December 31,
2007 and 2006. Actual losses on accounts receivable were $0 for 2008, 2007 and
2006. The Company has an operational relationship of several years with our
major customers, and we believe this experience provides us with a solid
foundation from which to estimate our expected losses on accounts receivable.
Should our sales mix change or if we develop new lines of business or new
customers, these estimates and our estimation process will change accordingly.
These estimates have been accurate in the past.
Fair
Value of Financial Instruments
The
Company measures its financial assets and liabilities in accordance with
accounting principles generally accepted in the United States of America. The
estimated fair values approximate their carrying value because of the short-term
maturity of these instruments or the stated interest rates are indicative of
market interest rates. These fair values also vary due to the market price of
the Company’s stock at the date of valuation. Generally, these liabilities will
increase as the price of the Company’s stock increases (with resultant gain),
and decrease as the Company’s stock decreases (yielding a loss). These
fluctuations are likely to continue as long as the Company has large financial
instrument liabilities on its balance sheet. Should the Company succeed in
removing these liabilities from its balance sheet, either by satisfying them or
by reclassifying them as equity, the amount of gains and losses recognized will
be reduced.
Income
Taxes
The
Company has a history of losses, and as such has recorded no liability for
income taxes. Until such time as the Company begins to generate a profit and
provides 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 as the Company has not
yet generated a profit
Background
We were
initially formed in June 1979 as Alpha Solarco Inc., a Colorado corporation.
From June 1979 through February 2003, we were either inactive or involved in
discontinued business ventures. In February 2003 we changed our name to Fiber
Application Systems Technology, Ltd.
In
January 2004, we changed our state of incorporation by merging into Innovative
Food Holdings, Inc. (“IVFH”), a Florida shell corporation. As a result of the
merger we changed our name to that of Innovative Food Holdings, Inc. In February
2004 we also acquired Food Innovations, Inc. (“FII”) a Delaware corporation
incorporated on January 9, 2002 and through FII we are in the business of
national food distribution using third-party shippers.
Transactions
With a Major Customer
Transactions
with a major customer and related economic dependence information is set forth
(1) following our discussion of Liquidity and Capital Resources, (2) under the
heading Transactions with Major Customers in Note 14 to the Consolidated
Financial Statements, and (3) as the fourth item under Risk Factors.
RESULTS
OF OPERATIONS
The
following is a discussion of our financial condition and results of operations
for the years ended December 31, 2008 and 2007, respectively.
This
discussion may contain forward looking-statements that involve risks and
uncertainties. Our actual results could differ materially from the forward
looking-statements discussed in this report. This discussion should be read in
conjunction with our consolidated financial statements, the notes thereto and
other financial information included elsewhere in the report.
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenue
Revenue
increased by $236,328 or approximately 3.5% to
$6,969,730 for the year ended December 31, 2008 from
$6,733,402 in the prior year. The increase was
attributable to an increase in sales of specialty items, cheese products,
and poultry products, partially offset by decreases in meat and game products,
and seafood. We continue to assess the potential of new revenue
sources from the manufacture and sale of proprietary food products and
additional sales channel opportunities and will implement that strategy if,
based on our analysis, we deem it beneficial to us.
Any
changes in the food distribution operating landscape that materially hinders our
current ability and/or cost to deliver our fresh produce to our customers could
potentially cause a material impact on our net revenue and gross margin and,
therefore, our profitability and cash flows could be adversely
affected.
Currently,
a small portion of our revenues comes from imported products or international
sales. Our current sales from such segments may be hampered and
negatively impacted by any economic tariffs that may be imposed in the United
States or in foreign countries.
See
"Transactions with Major Customers" and the Securities and Exchange Commission's
("SEC") mandated FR-60 disclosures following the "Liquidity and Capital
Resources" section for a further discussion of the significant customer
concentrations, loss of significant customer, critical accounting policies and
estimates, and other factors that could affect future results.
Cost of good
sold
Our cost
of goods sold for the year ended December 31, 2008 was $5,628,101, an
increase of $576,472 or approximately 11.4% compared to
cost of goods sold of $5,051,629 for the year ended
December 31, 2007. Cost of goods sold is primarily made up of the following
expenses for the year ended December 31, 2008: shipping expenses in the amount
of $1,556,297; and cost of good of specialty, meat, game, cheese
poultry and other sales categories in the amount
of $4,012,789
In 2008
we made a strategic decision to aggressively price our products in
order to gain market share and increase the number of our end
users. We were successful in doing so and increased the
number of our end users by approximately 17.7% to more
than 10,238 end users. We currently expect if market conditions
remain constant that our cost of goods sold will stabilize and likely improve to
historical levels in the first half
of 2009
Selling, general, and
administrative expenses
Selling,
general, and administrative expenses increased by $130,047 or
approximately 7.4%, to $1,879,239 during the year ended
December 31, 2008 from $1,749,192 for the year ended December
31, 2007. The increase
was due mainly to increased professional fees relating to fees for the Pasta
litigation and legal and accounting fees relating to our SEC
filings. Selling, general and administrative expenses were primarily
made up of the following for the year ended December 31, 2008: payroll and
related expenses in the amount of $1,012,480, including non-cash costs of
$132,596 related to stock options; consulting and professional fees in the
amount of $438,754; facilities and related expenses in the amount of $160,853;
insurance costs in the amount of $97,059; amortization and depreciation expense
in the amount of $39,316; travel and entertainment expenses in the amount of
$28,788; dues and subscriptions in the amounts of $20,945; advertising expenses
in the amount of $14,023; marketing and public relations expenses in the amount
of $13,390; bank and finance charges in the amount of $7,729; and food show
expenses in the amount of $5,516. We expect our legal fees to decrease in 2009
due to (i) an expected reduction in costs related to the Pasta litigation (ii)
our continued negotiation of flat billing fees rates with several of our
professional service providers including for much of our legal fees going
forward.. We also expect to incur reduced accounting fees in 2009 as
we have primarily addressed the SEC’s comments to our previous
filings. We do however expect to increase our spending on advertising
and marketing fees in 2009.
Impairment of investment in
note receivable
During
the twelve months ended December 31, 2008, the Company renegotiated the terms of
its loan to Pasta Italiana. These revised terms resulted in recording
an impairment in the amount of $142,124. There was no such impairment
recorded during the twelve months ended December 31, 2007. (See “Item
3 – Legal Proceedings”.)
Interest (income) expense,
net
Interest
(income) expense, net decreased by $130,444 or approximately 26% to
$372,175 during the twelve months ended December 31, 2008, compared to $502,619
during the twelve months ended December 31, 2007. The primary reason
for the decrease was a decrease in the amortization of the
discount on notes payable as many of these discounts were fully
amortized.
Loss on extinguishment of
debt
During
the year ended December 31, 2008, the Company extended certain of its notes
payable, and as consideration for these extensions the Company provided the
lender with warrants to purchase an aggregate 43,200,000 shares of
the Company’s common stock. This resulted in a loss on extinguishment
of debt in the amount of $168,620. There was no such transaction
during the comparable period of the prior year.
Penalty for late
registration of shares
Pursuant
to a registration rights agreement, the Company is obligated to register shares
of common stock underlying certain convertible notes payable. The
Company failed to register these shares in timely fashion, and
accordingly is subject to a penalty payable in additional shares of common stock
(the “Penalty Shares”). During the During the twelve months
ended December 31, 2008, the Company had no accrual for the issuance
of Penalty Shares, as the maximum number of Penalty Shares issuable had been
reached during the prior year. During the twelve months ended
December 31, 2007, the Company charged to operations the amount
of $64,984 representing the fair value of the liability
for Penalty Shares incurred. At December 31, 2008 and 2007, there
were a total of 110,280,000 Penalty Shares issuable.
Loss from revaluation of
penalty shares
During
the years ended December 31, 2008 and 2007, the Company revalued the 110,280,000
Penalty Shares using the Black-Scholes valuation model, and at December 31, 2008
and 2007 recorded liabilities in the amount of $551,400 and $330,840,
respectively. These revaluations resulted in recording losses in the
amount of $220,564 and $3,296 during the twelve months ended December 31, 2008
and 2007, respectively.
Fair value of warrants
issued in excess of discount on notes payable
During
the twelve months ended December 31, 2008, the Company issued convertible notes
payable along with detachable warrants to purchase shares of common
stock. The fair value of these warrants exceeded the principal amount
of the notes payable, and the Company charged this excess in the amount of
$99,960 to operations. There was no such charges during the prior
year.
Loss from change in fair
value of warrant liability
At
December 31, 2008, the Company has outstanding warrants to purchase an aggregate
273,200,000 shares of the Company’s common stock. The
Company valued this warrant liability at December 31, 2008 at
$1,388,287. This revaluation resulted in a loss of
$582,541 which the Company charged to operations during the year
ended December 31, 2008. This is an
increase $563,425 or approximately 2,947% compared to a
loss of $19,116 from the revaluation of the warrant liability which
the Company recorded during the twelve months ended December 31,
2007.
Fair value of conversion
option liability
During
the twelve months ended December 31, 2008, the Company charged to operations the
amount of $114,945 representing the fair value of a conversion option
liabilities issued in excess of the amount of the discount on the related
convertible notes payable. There was no such charge during the prior
year.
(Gain) loss from Change in
Fair Value of Conversion Option Liability
At
December 31, 2008, the Company had outstanding a liability to issue an aggregate
of 285,000,000 shares of the Company’s common stock pursuant to
convertible notes payable. The Company revalued this liability at
December 31, 2008 at $1,150,000. This revaluation resulted in a loss
of $182,583 which the Company included in operations for the year
ended December 31, 2008. This is an increase of
$193,681 or approximately 1,745% compared to a gain of $11,098 from
the revaluation of the conversion option liability which the Company recorded
during the twelve months ended December 31, 2007.
Net Loss
For the
reasons above, the Company had a net loss for the period ended December 31, 2008
of $2,421,122, an increase of $1,774,786 or approximately 275%
to compared a net loss of $646,336 during the twelve
months ended December 31, 2007.
Liquidity
and Capital Resources at December 31, 2008
As of
December 31, 2008, the Company had current assets of $469,111, consisting of
cash of $160,545, loans receivable of $ 60,000, other current assets
of $9,000, and trade accounts receivable of
$239,566. Also, at December 31, 2008, the Company had current
liabilities of $6,033,769, consisting of accounts payable and accrued
liabilities of $959,284 (of which $126,671 is payable to a related party);
accrued interest of $437,269; accrued interest – related parties of $173,471;
current portion of notes payable, net of discounts of $938,364; current portion
of notes payable – related parties, net of discounts of $261,002; warrant
liability of $1,388,287; option liability of $174,692; conversion option
liability of $1,150,000; and penalty for late registration of shares of
$551,400. This resulted in a working capital deficit of
$5,530,658.
During
the twelve months ended December 31, 2008, the Company had cash used by
operating activities of $113,070. The Company charged to operations $39,332 for
depreciation and amortization, $168,621 for the loss on extinguishment of debt,
$99,960 for the value of new warrants issued, $138,312 for the value of new
options issued, $114,945 for the value of new conversion options liability,
$78,137 for the amortization of the discount on notes payable, $35,360 for the
amortization of the discount on accrued interest, $5,877 for the reverse on bad
debt, $582,541 for the revaluation of the warrant liability, $182,586 for the
revaluation of the conversion option liability, $220,560 for the revaluation of
penalty shares, and recorded a gain of $5,717 for the revaluation of
the option liability, The Company’s results also
reflect an increase working capital deficiency of
$2,335,172.
The
Company had cash provided by investing act ivies of $3,871, which consisted of
payments made on a loan receivable of $12,000 and acquisitions of property and
equipment of $8,129.
The
Company cash provided by financing activities of $195,134, which consisted of
proceeds from notes payable of $200,000 and principal payments on debt of
$4,866.
Historically,
our primary cash requirements have been used to fund the cost of operations,
with additional funds having been used in promotion and advertising and in
connection with the exploration of new business lines.
The
Company’s cash on hand may be insufficient to fund its planned operating
needs. Management is continuing to pursue new debt and/or equity
financing and is continually evaluating the Company’s cash and capital
needs.
The
Company expects that any sale of additional equity securities or convertible
debt will result in additional dilution to our stockholders. The
Company can give no assurance that it will be able to generate adequate funds
from operations, that funds will be available, or the Company will be able to
obtain such funds on favorable terms and
conditions. If the Company cannot secure additional funds
it will not be able to continue as a going concern.
By
adjusting its operation and development to the level of available resources,
management believes it has sufficient capital resources to meet projected cash
flow through the next twelve months. The Company also intends to increase market
share and cash flow from operations by focusing its sales activities on specific
market segments. However, if thereafter, the Company is not successful in
generating sufficient liquidity from operations or in raising sufficient capital
resources, on terms acceptable to us, this could have a material adverse effect
on our business, results of operations, liquidity and financial
condition. Currently, we do not have any material long-term
obligations other than those described in Note 8 to the financial statements
included in this report, nor have we identified any long-term obligations that
we contemplate incurring in the near future. As we seek to increase our sales of
perishables, as well as identify new and other consumer oriented products and
services, we may use existing cash reserves, long-term financing, or other means
to finance such diversification.
The
independent auditors report on our December 31, 2008 financial statements state
that our recurring losses raise substantial doubts about our ability as a going
concern.
2009 Plans
During
2009, in addition to our efforts to increase sales in our existing foodservice
operations we plan to expand our business by extending our focus from
a purely wholesale foodservice business directed towards chefs to commencing
retail sales by making sales direct to consumers through a variety of direct to
consumer sales channel relationships which are currently being explored. In
addition we are currently exploring the introduction of a variety of new product
categories, to leverage our existing foodservice customer base.
As
discussed above, we also expect to improve our financial position, especially
with respect to cash flows, by reducing our expenditures for professional fees
to our attorneys and accountants, and by further improving our selling
efforts.
No
assurances can be given that any of these plans will come to fruition or that if
implemented that they will necessarily yield positive results.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues, or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
Inflation
In the
opinion of management, inflation has not had a material effect on the Company’s
financial condition or results of its operations.
Transactions
With Major Customers
The
Company’s largest customer, US Foodservice, Inc. and its affiliates,
accounted for approximately and 97% and 95% of total sales
in the years ended December 31, 2008, and 2007, respectively. A
contract with Next Day Gourmet, LP, a subsidiary of U.S. Foodservice, expires
September 11, 2009. Negotiations are underway to extend the existing contract or
to sign a new contract, and the Company has continued to have US
Foodservice, Inc. as a customer. Of our remaining active
customers in the year ended December 31, 2008, no other single customer
contributed 1% or more to our net revenue.
We
continue to conduct business with U.S. Food Services.
Critical
Accounting Policy and Accounting Estimate Discussion
Use
of Estimates in the Preparation of Financial Statements
The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities. These estimates include certain assumptions related to
doubtful accounts receivable, stock-based services, valuation of financial
instruments, and income taxes. On an on-going basis, we evaluate
these estimates, including those related to revenue recognition and
concentration of credit risk. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. We believe our estimates have not been
materially inaccurate in past years, and our assumptions are not likely to
change in the foreseeable future.
Doubtful Accounts
Receivable
The
Company maintained an allowance in the amount of $15,877 and $10,000 for
doubtful accounts receivable at December 31, 2008, 2007,
respectively. Actual losses on accounts receivable were $0 for 2008
and 2007. The Company has an operational relationship of several
years with our major customers, and we believe this experience provides us with
a solid foundation from which to estimate our expected losses on accounts
receivable. Should our sales mix change or if we develop new lines of
business or new customers, these estimates and our estimation process will
change accordingly. These estimates have been accurate in the
past.
Fair Value of Financial
Instruments
The
Company measures its financial assets and liabilities in accordance with
accounting principles generally accepted in the United States of America. The
estimated fair values approximate their carrying value because of the short-term
maturity of these instruments or the stated interest rates are indicative of
market interest rates. These fair values also vary due to the market
price of the Company’s stock at the date of valuation. Generally,
these liabilities will increase as the price of the Company’s stock increases
(with resultant gain), and decrease as the Company’s stock decreases (yielding a
loss). These fluctuations are likely to continue as long as the
Company has large financial instrument liabilities on its balance
sheet. Should the Company succeed in removing these liabilities from
its balance sheet, either by satisfying them or by reclassifying them as equity,
the amount of gains and losses recognized will be reduced.
Income
Taxes
The
Company has a history of losses, and as such has recorded no liability for
income taxes. Until such time as the Company begins to generate a
profit and provides 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 as the Company has not yet generated a
profit.
Stock-based
Compensation
Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised), "Share-Based
Payment" (SFAS 123(R)) utilizing the modified prospective approach. Prior to the
adoption of SFAS 123(R) we accounted for stock option grant in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees" (the intrinsic
value method), and accordingly, recognized compensation expense for stock option
grants.
Under the
modified prospective approach, SFAS 123(R) applies to new awards and to awards
that were outstanding on January 1, 2006 that are subsequently modified,
repurchased or cancelled. Under the modified prospective approach, compensation
cost recognized in the nine months of fiscal 2006 includes compensation cost for
all share-based payments granted prior to, but not yet vested as of January 1,
2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS 123, and compensation cost for all share-based
payments granted subsequent to January 1, 2006 based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(R). Prior periods
were not restated to reflect the impact of adopting the new
standard.
A summary
of option activity as of December 31, 2007, and changes during the
period ended December 31, 2008 are presented below:
|
Options
|
Weighted
Average Exercise Price
|
||||||
|
Outstanding
as December 31,2007
|
15,500,000
|
$
|
0.021
|
||||
|
Non-vested
at December 31, 2007
|
200,000
|
$
|
0.500
|
||||
|
Exercisable
at December 31, 2007
|
15,300,000
|
$
|
0.010
|
||||
|
Issued
|
20,000,000
|
$
|
0.007
|
||||
|
Exercised
|
--
|
--
|
|||||
|
Forfeited
or expired
|
--
|
--
|
|||||
|
Outstanding
at December 31, 2008
|
35,500,000
|
$
|
0.013
|
||||
|
Non-vested
at December 31, 2008
|
35,400,000
|
$
|
0.012
|
||||
|
Exercisable
at December 31, 2008
|
100,000
|
$
|
0.500
|
||||
Aggregate
intrinsic value of options outstanding and exercisable at December 31, 2007 and
2008 was $0. Aggregate intrinsic value represents the difference between the
Company's closing stock price on the last trading day of the fiscal period,
which was $0.003 and $0.005 as of December 31, 2007 and
2008, respectively, and the exercise price multiplied by the number of options
outstanding. As of December 31, 2007 and 2008, total unrecognized stock-based
compensation expense related to stock options was $0. During the years ended
December 31, 2007 and 2008, the Company charged $0 and $67,500,
respectively, to operations related to recognized stock-based compensation
expense for employee stock options.
Report
of Independent Registered Public Accounting
Firm
To
the Board of Directors and Shareholders of
Innovative
Food Holdings, Inc.
Naples,
Florida
We
have audited the accompanying consolidated balance sheets of Innovative Food
Holdings, Inc and subsidiaries (“the Company”) as of December 31, 2008 and 2007
and the related consolidated statements of operations, stockholders' deficiency,
and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have nor were we engaged to perform, an audit of its Internal
Control over financial reporting. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2008 and 2007 and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
15, the Company has incurred significant losses from operations since its
inception and has a working capital deficiency. These conditions
raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans in regard to these matters are also described in
Note 15. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
Bernstein & Pinchuk LLP
New
York, New York
April
7, 2009
|
Innovative
Food Holdings, Inc. and Subsidiaries
|
||||||||
|
Consolidated
Balance Sheets
|
||||||||
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
(Restated)
|
|||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$
|
160,545
|
$
|
74,610
|
||||
|
Accounts
receivable, net
|
239,566
|
243,148
|
||||||
|
Interest
receivable
|
-
|
7,147
|
||||||
|
Loan
receivable, current portion net
|
60,000
|
285,000
|
||||||
|
Other
current assets
|
9,000
|
7,030
|
||||||
|
Total
current assets
|
469,111
|
616,935
|
||||||
|
Loan
receivable, net
|
93,000
|
-
|
||||||
|
Property
and equipment, net
|
52,620
|
83,823
|
||||||
|
$
|
614,731
|
$
|
700,758
|
|||||
|
LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable and accrued liabilities
|
$
|
832,613
|
$
|
692,586
|
||||
|
Accrued
liabilities- related parties
|
126,671
|
73,027
|
||||||
|
Accrued
interest, net
|
437,269
|
316,058
|
||||||
|
Accrued
interest - related parties, net of discount
|
173,471
|
142,621
|
||||||
|
Notes
payable, current portion, net of discount
|
938,364
|
927,870
|
||||||
|
Notes
payable - related parties, current portion, net of
discount
|
261,002
|
278,000
|
||||||
|
Warrant
liability
|
1,388,287
|
431,188
|
||||||
|
Option
liability
|
174,692
|
42,097
|
||||||
|
Conversion
option liability
|
1,150,000
|
612,134
|
||||||
|
Penalty
for late registration of shares
|
551,400
|
330,840
|
||||||
|
Total
current liabilities
|
6,033,769
|
3,846,421
|
||||||
|
Note
payable
|
10,723
|
16,083
|
||||||
|
6,044,492
|
3,862,504
|
|||||||
|
Stockholders'
deficiency
|
||||||||
|
Common
stock, $0.0001 par value; 500,000,000 shares authorized;
|
||||||||
|
183,577,038
and 181,787,638 shares issued, and 173,577,038
and
|
||||||||
|
171,787,638
shares outstanding at December 31, 2008 and 2007,
respectively
|
18,358
|
18,179
|
||||||
|
Additional
paid-in capital
|
1,985,335
|
1,832,407
|
||||||
|
Accumulated
deficit
|
(7,433,454
|
)
|
(5,012,332
|
)
|
||||
|
Total
stockholders' deficiency
|
(5,429,761
|
)
|
(3,161,746
|
)
|
||||
|
$
|
614,731
|
$
|
700,758
|
|||||
See notes
to consolidated financial statements.
|
Innovative
Food Holdings, Inc. and Subsidiaries
|
||||||||
|
Consolidated
Statements of Operations
|
||||||||
|
|
|
|||||||
|
Year
Ended
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(Restated)
|
||||||||
|
Revenue
|
$
|
6,969,730
|
$
|
6,733,402
|
||||
|
Cost
of goods sold
|
5,628,101
|
5,051,629
|
||||||
|
Gross
margin
|
1,341,629
|
1,681,773
|
||||||
|
Selling,
General and administrative expenses
|
1,879,239
|
1,749,192
|
||||||
|
Operating
loss
|
(537,610
|
)
|
(67,419
|
)
|
||||
|
Other
(income) expense:
|
||||||||
|
Impairment
of notes receivable
|
142,124
|
-
|
||||||
|
Interest
(income) expense, net
|
372,175
|
502,619
|
||||||
|
Loss
on extinguishment of debt
|
168,620
|
-
|
||||||
|
Cost
of penalty for late registration of shares
|
-
|
64,984
|
||||||
|
Loss
on revaluation of penalty shares
|
220,564
|
3,296
|
||||||
|
Fair
value of warrants issued in excess of discount on notes
|
99,960
|
-
|
||||||
|
Loss
from change in fair value of warrant liability
|
582,541
|
19,116
|
||||||
|
Fair
value of conversion options issued
|
114,945
|
-
|
||||||
|
(Gain)
loss from change in fair value of conversion option
liability
|
182,583
|
(11,098
|
)
|
|||||
|
1,883,512
|
578,917
|
|||||||
|
Loss
before tax expense
|
(2,421,122
|
)
|
(646,336
|
)
|
||||
|
Income
tax expense
|
-
|
-
|
||||||
|
Net
loss
|
$
|
(2,421,122
|
)
|
$
|
(646,336
|
)
|
||
|
Net
loss per share - basic and diluted
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
||
|
Weighted
average shares outstanding - basic and diluted
|
182,011,728
|
154,106,110
|
||||||
See notes
to consolidated financial statements.
|
Innovative
Food Holdings, Inc. and Subsidiaries
|
||||||||
|
Consolidated
Statements of Cash Flows
|
||||||||
|
Year
Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
(Restated)
|
|||||||
|
Net
loss
|
$
|
(2,421,122
|
)
|
$
|
(646,336
|
)
|
||
|
Adjustments
to reconcile net loss to net
|
||||||||
|
cash
provided by operating activities:
|
||||||||
|
Depreciation
and amortization
|
39,332
|
49,415
|
||||||
|
Stock
issued to employees for services performed
|
-
|
8,125
|
||||||
|
Loss on extinguishment of debt
|
168,620
|
-
|
||||||
|
Fair
value of warrants issued
|
99,960
|
-
|
||||||
|
Fair
value of stock options issued
|
138,312
|
37
|
||||||
|
Fair
value of conversion options issued
|
114,945
|
-
|
||||||
|
Amortization
of discount on notes payable
|
78,137
|
181,952
|
||||||
|
Amortization
of discount on accrued interest
|
135,360
|
155,249
|
||||||
|
Impairment
of investment in notes receivable
|
142,124
|
-
|
||||||
|
Allowance
for bad debt
|
5,877
|
-
|
||||||
|
Cost of penalty due to late registration of shares
|
-
|
64,984
|
||||||
|
Change in fair value of warrant liability
|
582,541
|
19,116
|
||||||
|
Change
in fair value of option liability
|
(5,717
|
)
|
1,624
|
|||||
|
Change in fair value of conversion option liability
|
182,583
|
(11,097
|
)
|
|||||
|
Revaluation of penalty for late registration of shares
|
220,564
|
3,296
|
||||||
|
Changes
in assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(2,295
|
)
|
72,551
|
|||||
|
Prepaid
expenses and other current assets
|
(1,970
|
)
|
8,479
|
|||||
|
Accounts
payable and accrued expenses- related party
|
84,495
|
-
|
||||||
|
Accounts
payable and accrued expenses
|
325,184
|
95,997
|
||||||
|
Net
cash (used in) provided by operating activities
|
(113,070
|
)
|
3,392
|
|||||
|
Cash
flows from investing activities:
|
||||||||
|
Principal
payments received on loan
|
12,000
|
-
|
||||||
|
Acquisition
of property and equipment
|
(8,129
|
)
|
(40,610
|
)
|
||||
|
Net
cash provided by (used in) investing activities
|
3,871
|
(40,610
|
)
|
|||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from issuance of debt
|
200,000
|
-
|
||||||
|
Principal
payments on debt
|
(4,866
|
)
|
(6,690
|
)
|
||||
|
Net
cash provided by (used in) financing activities
|
195,134
|
(6,690
|
)
|
|||||
|
Increase
(decrease) in cash and cash equivalents
|
85,935
|
(43,908
|
)
|
|||||
|
Cash
and cash equivalents at beginning of year
|
74,610
|
118,518
|
||||||
|
Cash
and cash equivalents at end of year
|
$
|
160,545
|
$
|
74,610
|
||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid during the period for:
|
||||||||
|
Interest
|
$
|
1,926
|
$
|
2,268
|
||||
|
Taxes
|
$
|
-
|
$
|
-
|
||||
|
Other
items not affecting cash:
|
||||||||
|
Revaluation
of conversion option liability
|
$
|
297,528
|
$
|
(11,098
|
)
|
|||
|
Revaluation
of warrant liability
|
$
|
682,501
|
$
|
19,116
|
||||
|
Cost
of penalty for late registration for shares
|
$
|
-
|
$
|
64,984
|
||||
|
Cancellation
of shares of common stock
|
$
|
-
|
$
|
557
|
||||
|
Common
stock issued to employees as bonus
|
$
|
-
|
$
|
8,125
|
||||
|
Common
stock issued for conversion of notes payable and accrued
interest
|
$
|
-
|
$
|
164,000
|
||||
See notes
to consolidated financial statements.
|
Innovative
Food Holdings, Inc. and Subsidiaries
|
|
|
Consolidated
Statements of Changes in Stockholders' Deficiency
|
|
|
For
the two years ended December 31, 2008
|
|
Common
Stock
|
||||||||||||||||||||
|
Amount
|
Par
Value
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Total
|
||||||||||||||||
|
Balance
at December 31, 2006
|
151,310,796
|
$
|
15,131
|
$
|
1,358,334
|
$
|
(4,365,996
|
)
|
$
|
(2,992,531
|
)
|
|||||||||
|
Common
shares cancelled
|
(5,573,158
|
)
|
(557
|
)
|
557
|
-
|
-
|
|||||||||||||
|
Common
shares issued for employee bonuses
|
3,250,000
|
325
|
7,800
|
-
|
8,125
|
|||||||||||||||
|
Common
stock issued for conversion of note payable and accrued
interest
|
32,800,000
|
3,280
|
160,720
|
-
|
164,000
|
|||||||||||||||
|
Reclassification
of conversion option liability
|
-
|
-
|
149,747
|
-
|
149,747
|
|||||||||||||||
|
Discount
due to Beneficial conversion feature on interest accrued on convertible
notes payable
|
-
|
-
|
155,249
|
-
|
155,249
|
|||||||||||||||
|
Loss
for the year ended December 31, 2007
|
-
|
-
|
-
|
(646,336
|
)
|
(646,336
|
)
|
|||||||||||||
|
Balance
at December 31, 2007 (Restated)
|
181,787,638
|
$
|
18,179
|
$
|
1,832,407
|
$
|
(5,012,332
|
)
|
$
|
(3,161,746
|
)
|
|||||||||
|
Common
stock issued for the conversion of notes payable and accrued
interest
|
1,789,400
|
179
|
8,768
|
-
|
8,947
|
|||||||||||||||
|
Reclassification
of conversion option liability
|
-
|
-
|
8,800
|
-
|
8,800
|
|||||||||||||||
|
Discount
due to Beneficial conversion feature on interest accrued on convertible
notes payable
|
-
|
-
|
135,360
|
-
|
135,360
|
|||||||||||||||
|
Loss
for the year ended December 31, 2008
|
-
|
-
|
-
|
(2,421,122
|
)
|
(2,421,122
|
)
|
|||||||||||||
|
Balance
as of December 31, 2008
|
183,577,038
|
$
|
18,358
|
$
|
1,985,335
|
$
|
(7,433,454
|
)
|
$
|
(5,429,761
|
)
|
|||||||||
.
See notes
to consolidated financial statements.
INNOVATIVE
FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Activity
Food
Innovations, Inc. (“FII”) is in the business of providing premium white
tablecloth restaurants with the freshest origin-specific perishables and
specialty products direct from its network of vendors to the end users
(restaurants, hotels, country clubs, national chain accounts, casinos, and
catering houses) within 24 - 72 hours, except as stated hereafter,
eliminating all wholesalers and distributors. We currently sell the majority of
our products through a distributor relationship with Next Day Gourmet, L.P., a
subsidiary of US Foodservice, Inc. (“USF”), a $20 Billion broadline
distributor.
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reported periods. Actual results could materially differ from those
estimates.
Principles of
Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned operating subsidiary, Food Innovations,
Inc. and its other wholly-owned subsidiaries Food New Media Group,
Inc. and 4 The Gourmet, Inc. All material intercompany
transactions have been eliminated upon consolidation of these
entities.
Revenue
Recognition
The
Company recognizes revenue upon product shipment. We ship all
our products either overnight shipping terms or three day shipping terms to the
customer and the customer takes title to product and assumes risk and ownership
of the product when it is shipped. Shipping changes 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
Staff Accounting Bulletin ("SAB") No.
104, "Revenue Recognition," which superseded
SAB No. 101, "Revenue Recognition in
Financial Statements." SAB No. 104 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. SAB No. 104
incorporates Emerging Issues Task Force ("EITF") No.
00-21, "Multiple-Deliverable Revenue Arrangements." EITF
No. 00-21 addresses accounting for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use
assets. The effect of implementing EITF No. 00-21 on the Company's
consolidated financial position and results of operations was not significant.
This issue addresses determination of whether an arrangement involving more than
one deliverable contains more than one unit of accounting and how the
arrangement consideration should be measured and allocated to the separate units
of accounting. EITF No. 00-21 became effective for revenue
arrangements entered into in periods beginning after June 15,
2003. For revenue arrangements occurring on or after August 1, 2003,
the Company revised its revenue recognition policy to comply with the provisions
of EITF No. 00-21 and EITF 99-19.
Cost of goods
sold
We have
included in cost of good sold all costs which are directly related to the
generation of revenue. These costs include primarily the cost of the product
plus the shipping costs.
Selling, general, and
administrative expenses
We have
included in selling, general, and administrative expenses all other costs which
support the Company’s operations but which are not includable as a cost of
sales. These include primarily payroll, facility costs such as rent and
utilities, selling expenses such as commissions and advertising,, and other
administrative costs including professional fees. Advertising costs
are expensed as incurred.
Cash and Cash
Equivalents
Cash
equivalents include all highly liquid debt instruments with original maturities
of three months or less which are not securing any corporate
obligations.
Accounts
Receivable
The
Company provides an allowance for doubtful accounts equal to the estimated
uncollectible amounts. The Company’s estimate is based on historical
collection experience and a review of the current status of trade accounts
receivable. It is reasonably possible that the Company’s estimate of
the allowance for doubtful accounts will change. Accounts receivable
are presented net of an allowance for doubtful accounts of $15,877
and $10,000 at December 31, 2008 and 2007, respectively.
Property and
Equipment
Property
and equipment are valued at cost. Depreciation is provided over the
estimated useful lives up to five years using the straight-line
method. Leasehold improvements are depreciated on a straight-line
basis over the term of the lease.
The
estimated service lives of property and equipment are as follows:
Computer
Equipment
3 years
Office
Furniture and Fixtures 5 years
Inventories
The
Company does not currently maintain any material amount of
inventory.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax
bases. Deferred tax assets, including tax loss and credit
carryforwards, and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Deferred
income tax expense represents the change during the period in the deferred tax
assets and deferred tax liabilities. The components of the deferred tax assets
and liabilities are individually classified as
current and non-current based on their characteristics. Realization
of the deferred tax asset is dependent on generating sufficient taxable income
in future years. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Fair Value of Financial
Instruments
The
carrying amount of the Company’s cash and cash equivalents, accounts receivable,
notes payable, line of credit, accounts payable and accrued expenses, none of
which is held for trading, approximates their estimated fair values due to the
short-term maturities of those financial instruments.
Long-Lived
Assets
The
Company reviews its property and equipment and any identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The test for
impairment is required to be performed by management at least annually.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the future undiscounted operating cash flow
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
value less costs to sell.
As of
December 31, 2008, the Company’s management believes there is no impairment
of its long-lived assets. There can be no assurance, however, that
market conditions will not change which could result in impairment of long-lived
assets in the future.
Comprehensive
Income
Statement
of Financial Accounting Standards No. 130 (“SFAS 130”), “Reporting Comprehensive
Income,” establishes standards for reporting and displaying of comprehensive
income, its components and accumulated balances. Comprehensive income
is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company does not have any items of
comprehensive income in any of the periods presented.
Basic and Diluted Loss Per
Share
In
accordance with SFAS No. 128, "Earnings Per Share," the basic loss per common
share is computed by dividing net loss available to common stockholders less
preferred dividends by the weighted average number of common shares outstanding.
Diluted loss per common share is computed similarly to basic loss per common
share, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were not
anti-dilutive.
The
Company has excluded the following securities from the calculation of diluted
net loss per share because these securities are anti-dilutive:
Anti-dilutive
shares at December 31, 2008:
Warrants
to purchase 179,700,000 shares at $0.005 per share, 18,500,000 shares at $0.011
per share, and 74,000,000 shares at $0.0115 per share were not
included in the computation of loss per share because the warrant exercise
prices were greater than the average market price of the
common shares. Also not included in the calculation of loss per
share were 399,984,600 shares issuable upon the conversion of debt and
convertible interest; 35,500,000 shares issuable upon the conversion of
options, 110,280,000 penalty shares issuable because the effect would have been
anti-dilutive; 5,000,000 shares of common stock the Company has committed to
issue to a service provider; and 3,000,000 shares of common stock the Company
has committed to issue to its President.
Anti-dilutive
shares at December 31, 2007:
Warrants
to purchase 136,500,000 shares at $0.005 per share, 10,500,000 shares at $0.011
per share, and 136,500,000 shares at $0.005 per share were not included in
the computation of earnings per share because the warrant exercise prices were
greater than the average market price of the common shares. Also
not included in the calculation of earnings per share were 255,684,260 shares
issuable upon the conversion of debt and convertible interest;
15,500,000 shares issuable upon the conversion of options,
and 98,900,000 penalty shares issuable because the effect would have
been antidilutive.
Liquidity
As
reflected in the accompanying consolidated financial statements, the Company had
net losses of $2,421,122 and $646,336 for the years ended December
31, 2008 and 2007, respectively. This variance was
principally due to changes in fair values of warrant, conversion option and
registration penalty liabilities rather to differences in actual operating
results. The Company has an accumulated deficit
of $7,433,454 at December 31,
2008. In addition, the Company’s current liabilities exceeded its
current assets by $5,564,658 as of December 31,
2008. Consequently, its operations are subject to all risks inherent
in the establishment of a new business enterprise.
Historically,
we have funded our operations from cash generated by operations and from the
issuance of both debt and equity securities. The Company’s cash on
hand may be insufficient to fund its planned operating
needs. Management is continuing to pursue new debt and/or equity
financing and is continually evaluating the Company’s cash and capital
needs.
The
Company expects that any sale of additional equity securities or convertible
debt will result in additional dilution to our stockholders. The
Company can give no assurance that it will be able to generate adequate funds
from operations, that funds will be available, or the Company will be able to
obtain such funds on favorable terms and conditions. It the Company
cannot secure additional funds it will not be able to continue as a going
concern.
By
adjusting its operation and development to the level of available resources,
management believes it has sufficient capital resources to meet projected cash
flow through the next twelve months. The Company also intends to increase market
share and cash flow from operations by focusing its sales activities on specific
market segments. However, if thereafter, the Company is not successful in
generating sufficient liquidity from operations or in raising sufficient capital
resources, on terms acceptable to us, this could have a material adverse effect
on our business, results of operations, liquidity and financial
condition. Currently, we do not have any material long-term
obligations other than those described in Note 7 to the financial statements
included in this report, nor have we identified any long-term obligations that
we contemplate incurring in the near future. As we seek to increase our sales of
perishables, as well as identify new and other consumer oriented products and
services, we may use existing cash reserves, long-term financing, or other means
to finance such diversification.
The
independent auditors report on our December 31, 2008 financial statements state
that our recurring losses raise substantial doubts about our ability as a going
concern.
Concentrations of Credit
Risk
Financial
instruments and related items, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash, cash equivalents and
trade receivables. The Company places its cash and temporary cash in investments
with credit quality institutions. At times, such investments may be in excess of
applicable government mandated insurance limit. At December 31, 2008 and 2007,
trade receivables from the Company’s largest customer amount to 86% and 81%,
respectively, of total trade receivables.
Reclassification
Certain
reclassifications have been made in prior year’s financial statements to conform
to classifications used in the current year.
Stock-based
Compensation
Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised), "Share-Based
Payment" (SFAS 123(R)) utilizing the modified prospective approach. Prior to the
adoption of SFAS 123(R) we accounted for stock option grant in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees" (the intrinsic
value method), and accordingly, recognized compensation expense for stock option
grants.
Under the
modified prospective approach, SFAS 123(R) applies to new awards and to awards
that were outstanding on January 1, 2006 that are subsequently modified,
repurchased or cancelled. Under the modified prospective approach, compensation
cost recognized in the nine months of fiscal 2006 includes compensation cost for
all share-based payments granted prior to, but not yet vested as of January 1,
2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS 123, and compensation cost for all share-based
payments granted subsequent to January 1, 2006 based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(R). Prior periods
were not restated to reflect the impact of adopting the new
standard.
In August
2005, the Company’s commitments to issue shares of common stock first exceeded
its common stock authorized. At this time, the Company began to value its stock
options via the liability method of accounting. Pursuant to guidance in SFAS
123(R), the cost of these options are valued via the Black-Scholes valuation
method when issued, and re-valued at each reporting period. The gain
or loss from this revaluation is charged to compensation expense during the
period. Options expense and gain or loss on revaluation during the
twelve months ended December 31, 2007 and 2008 are summarized in the table
below:
|
December
31,
|
|||||||
|
2008
|
2007
|
||||||
|
Option
expense
|
$ | 50 | $ | 37 | |||
|
(Gain)
loss on revaluation of options
|
(5,717
|
) | 1,623 | ||||
A summary
of option activity as of December 31, 2007, and changes during the period ended
December 31, 2008 are presented below:
|
Options
|
Weighted
Average Exercise Price
|
||||||
|
Outstanding
as December 31,2007
|
15,500,000
|
$
|
0.021
|
||||
|
Non-vested
at December 31, 2007
|
200,000
|
$
|
0.500
|
||||
|
Exercisable
at December 31, 2007
|
15,300,000
|
$
|
0.010
|
||||
|
Issued
|
20,000,000
|
$
|
0.007
|
||||
|
Exercised
|
--
|
--
|
|||||
|
Forfeited
or expired
|
--
|
--
|
|||||
|
Outstanding
at December 31, 2008
|
35,500,000
|
$
|
0.013
|
||||
|
Non-vested
at December 31, 2008
|
100,000
|
$
|
0.500
|
||||
|
Exercisable
at December 31, 2008
|
35,400,000
|
$
|
0.012
|
||||
Aggregate
intrinsic value of options outstanding and exercisable at December 31, 2007 and
2008 was $0. Aggregate intrinsic value represents the difference between the
Company's closing stock price on the last trading day of the fiscal period,
which was $0.003 and $0.005 as of December 31, 2007 and
2008, respectively, and the exercise price multiplied by the number of options
outstanding. As of December 31, 2007 and 2008, total unrecognized stock-based
compensation expense related to stock options was $0. During the years ended
December 31, 2007 and 2008, the Company charged $37 and $138,313,
respectively, to operations related to recognized stock-based compensation
expense for employee stock options.
Significant Recent
Accounting Pronouncements
In June
2008, the FASB issued EITF Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-5”).
EITF 07-5 supersedes EITF Issue No. 01-6, The Meaning of ‘Indexed to a
Company’s Own Stock’, and provides guidance in evaluating whether certain
financial instruments or embedded features can be excluded from the scope of
SFAS No. 133, Accounting for
Derivatives and Hedging Activities (“SFAS 133”). EITF 07-5 sets forth a
two-step approach that evaluates an instrument’s contingent exercise and
settlement provisions for the purpose of determining whether such instruments
are indexed to an issuer’s own stock (a requirement necessary to comply with the
scope exception under SFAS 133). EITF 07-5 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. We are currently assessing the impact related to the
adoption of EITF 07-5 on our financial instruments.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
141(R)”), which replaces SFAS No. 141, Business Combinations, and
requires an acquirer to recognize the assets acquired, the liabilities assumed
and any non-controlling interest in the acquired company at the acquisition
date, measured at their fair values as of that date, with limited exceptions.
SFAS 141(R) also requires the acquirer in a business combination achieved in
stages to recognize the identifiable assets and liabilities, as well as the
non-controlling interest in the acquired company, at the full amounts of their
fair values. SFAS 141(R) makes various other amendments to authoritative
literature intended to provide additional guidance or conform the guidance in
that literature to that provided in SFAS 141(R). SFAS 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The potential impact of adopting SFAS 141(R) will depend on
the magnitude and frequency of our future acquisitions.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS 160”), which amends Accounting
Research Bulletin No. 51, Consolidated Financial
Statements, to improve the relevance, comparability and transparency of
the financial information that a reporting entity provides in its consolidated
financial statements. SFAS 160 establishes accounting and reporting standards
that require the ownership interests in subsidiaries not held by the parent to
be clearly identified, labeled and presented in the consolidated statement of
financial position within equity, but separate from the parent’s equity. SFAS
160 also requires the amount of consolidated net income attributable to the
parent and to the non-controlling interest to be clearly identified and
presented on the face of the consolidated statement of operations. Changes in a
parent’s ownership interest while the parent retains its controlling financial
interest must be accounted for consistently, and when a subsidiary is
deconsolidated, any retained non-controlling equity investment in the former
subsidiary must be initially measured at fair value. The gain or loss on the
deconsolidation of the subsidiary is measured using the fair value of any
non-controlling equity investment. SFAS 160 also requires entities to provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 applies prospectively to all entities that prepare consolidated financial
statements and applies prospectively for all fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. We do not
believe that its adoption will have a significant impact on our consolidated
financial statements.
In March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”. The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. We do not believe that
its adoption will have a significant impact on our consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose
to measure many financial instruments, and certain other items, at fair value.
SFAS 159 applies to reporting periods beginning after November 15, 2007. The
adoption of SFAS 159 is not expected to have a material impact on the Company’s
financial condition or results of operations.
2.
ACCOUNTS RECEIVABLE
At
December 31, 2008 and 2007, accounts receivable consists of:
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
Accounts
receivable from customers
|
$
|
255,443
|
$
|
253,148
|
||||
|
Allowance
for doubtful accounts
|
(15,877
|
)
|
(10,000
|
)
|
||||
|
Accounts
receivable, net
|
$
|
239,566
|
$
|
243,148
|
||||
3. LOAN
RECEIVABLE AND INTEREST RECEIVABLE
The
balance of loan receivable consisted of a loan to Pasta Italiana, Inc. in the
net carrying amount of $153,000 at December 31, 2008 and $285,000 at December
31, 2007, respectively. This note bears interest at the
rate of 15% per annum. The loan was renegotiated during
the twelve months ended December 31, 2008, and resulted in the Company
recognizing an impairment to the loan in the amount of $142,124, which was
charged to operations during the year ended December 31, 2008. This
impairment was based upon the renegotiated principal and interest amount due the
Company. At December 31, 2008, $60,000 of the amount due is
classified as a current asset, and $93,000 is classified as a long term asset.
At December 31, 2007, $285,000 was classified as a current asset, and none is
classified as a long-term asset. (See note 17).
4.
PROPERTY AND EQUIPMENT
A summary
of property and equipment at December 31, 2008 and 2007, is as
follows:
|
December
31,
2008
|
December
31, 2007
|
|||||||
|
Computer
hardware and software
|
$
|
292,608
|
$
|
288,228
|
||||
|
Furniture
and fixtures
|
67,298
|
63,565
|
||||||
|
359,906
|
351,793
|
|||||||
|
Less
accumulated depreciation and amortization
|
(307,286
|
)
|
(267,970
|
)
|
||||
|
Total
|
$
|
52,620
|
$
|
83,823
|
||||
Depreciation
and amortization expense for property and equipment amounted to
$39,332 and $49,415 for the year ended December 31, 2008 and 2007,
respectively.
5.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts
payable and accrued liabilities at December 31, 2008 and 2007 are as
follows:
|
December
31,
|
December
31,
|
||||||
|
2008
|
2008
|
||||||
|
Trade
payables
|
$ | 824,172 | $ | 678,455 | |||
|
Accrued
payroll and commissions
|
8,441 | 14,131 | |||||
| $ | 832,613 | $ | 692,586 | ||||
At
December 31, 2008 and 2007, accrued liabilities to related parties consisted of
accrued payroll and payroll related benefits.
6. ACCRUED
INTEREST
Accrued
interest on the Company’s convertible notes payable is convertible at the option
of the note holders into the Company’s common stock at price ranging from of
$0.005 to $0.010 per share . There is a beneficial conversion feature
embedded in the convertible accrued interest. The Company is
amortizing this beneficial conversion feature over the life of the
related notes payable. Certain of the notes payable have
exceeded their stated terms, and are still outstanding; in those
instances, the Company expenses the value of the beneficial conversion feature
on the accrued interest immediately.
During
the twelve months ended December 31, 2008 and 2007, the amounts of $135,360, and
$155,249, respectively, were credited to additional paid-in capital as a
discount on convertible interest. The aggregate amount of discounts
on convertible interest charged to operations during the twelve months ended
December 31, 2008 and 2007 was $135,360 and $155,249,
respectively.
At
December 31, 2008, the Company has the following accrued interest on its balance
sheet:
|
Gross
|
Discount
|
Net
|
|||||||||
|
Non-related
parties
|
$
|
441,013
|
$
|
3,744
|
$
|
437,269
|
|||||
|
Related
parties
|
173,471
|
-
|
173,471
|
||||||||
|
Total
|
$
|
614,484
|
$
|
3,744
|
$
|
610,740
|
|||||
At
December 31, 2007, the Company has the following accrued interest on its balance
sheet:
|
Gross
|
Discount
|
Net
|
|||||||||
|
Non-related
parties
|
$
|
316,058
|
$
|
-
|
$
|
316,058
|
|||||
|
Related
parties
|
142,621
|
-
|
142,621
|
||||||||
|
Total
|
$
|
458,679
|
$
|
-
|
$
|
458,679
|
|||||
Certain
of the accrued interest is convertible in to shares of the Company’s common
stock at prices ranging from $0.005 to $0.010 per share. At December 31, 2008,
convertible accrued interest was $587,981 which was convertible into 114,043,320
shares of common stock; at December 31, 2007, convertible accrued interest was
$438,195 which was convertible into 84,968,520 shares of common
stock.
7. NOTES
PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
|
December
31, 2008
|
December
31, 2007
|
|||||
|
Convertible
note payable in the original amount of $350,000 to Alpha Capital
Aktiengesselschaft (“Alpha Capital”), dated February 25, 2005. This note
consists of $100,000 outstanding under a previous note payable which was
cancelled on February 25, 2005, and $250,000 of new borrowings. We did not
meet certain of our obligations under the loan documents relating to this
issuance. These lapses include not reserving the requisite
number of treasury shares, selling subsequent securities without offering
a right of first refusal, not complying with reporting obligations, not
having our common shares quoted on the OTC:BB and not timely registering
certain securities. This note entered technical
default status on May 16, 2005. The note originally
carried interest at the rate of 8% per annum,
and was due in full on February 24, 2007. Upon
default, the note’s interest rate increased to 15% per annum, and the note
became immediately due. The note is convertible into common stock of the
Company at a conversion price of $0.005 per share. A beneficial conversion
feature in the amount of $250,000 was recorded as a discount to the note,
and was amortized to interest expense during the twelve months ended
December 31, 2005. Accrued interest is convertible into common stock of
the Company at a conversion price of $0.005 per share .
Interest in the amount of $51,889 and $51,747 was accrued on
this note during the twelve months ended December 31,
2008 and 2007, respectively. During the twelve months
ended December 31, 2006 the note holder converted $5,000 into shares of
common stock. During the twelve months ended December 31, 2006 the holder
of the note converted $27,865 of accrued interest into common
stock. This note is in default at December 31, 2008 and
2007.
|
$
|
345,000
|
$
|
345,000
|
||
|
Convertible
note payable in the amount of $160,000 to Michael Ferrone, a board member
and related party, dated March 11, 2004. The note bears interest at the
rate of 8% per annum, has no provisions for a default or past due rate and
was originally due in full on March 11, 2006. On February 25, 2005, an
amendment to the convertible note was signed which extended the term,
which resulted in a new maturity date of October 12, 2006. The note is
convertible by the holder into common stock of the Company at a conversion
of $0.005 per share. A beneficial conversion feature in the amount of
$160,000 was recorded as a discount to the note, and was
amortized to interest expense during the twelve months ended
December 31, 2004 and 2005. Interest in the amount of $0 and
$10,835 was accrued on this note during the twelve
months ended December 31, 2008, and 2007, respectively. During the
twelve months ended December 31, 2007, the note holder
converted a total of $160,000 of principal into 32,000,000 shares of
common stock.
|
-
|
-
|
|||
|
Convertible
note payable in the original amount of $100,000 to Joel Gold, a board
member and related party, dated October 12, 2004. The note bears interest
at the rate of 8% per annum, has no provisions for a default or past due
rate and was due in full on October 12, 2006. The note is convertible by
the holder into common stock of the Company at a conversion price of
$0.005 per share . A beneficial conversion feature in the
amount of $100,000 was recorded as a discount to the note, and was
amortized to interest expense during the twelve months ended December 31,
2004 and 2005. Accrued interest is convertible by the holder into common
stock of the Company at maturity of the note at a price of $0.005 per
share. Interest in the amount of $2,005 and $1,999
was accrued on this note during the twelve months ended December 31, 2008,
and 2007, respectively. During the twelve months ended December
31, 2006, $75,000 of the principal amount was converted into common stock.
This note was in default at December 31, 2008
and 2007.
|
25,000
|
25,000
|
|||
|
Convertible
note payable in the amount of $85,000 to Briolette Investments, Ltd, dated
March 11, 2004. The note bears interest at the rate of 8% per annum, has
no provisions for a default or past due rate and was due in full on March
11, 2006. The note is convertible into common stock of the Company at a
conversion of $0.005 per share. A beneficial conversion
feature in the amount of $85,000 was recorded as a discount to
the note, and was amortized to interest expense during the twelve months
ended December 31, 2004, 2005, and 2006. Accrued interest is convertible
by the holder into common stock of the Company at a price of $0.005 per
share. Interest in the amount of $3,064 and
$3,039 was accrued on this note during the twelve months ended
December 31, 2008 and 2007, respectively. During the twelve months ended
December 31, 2005, the note holder converted $44,000 of the note payable
into common stock. During the twelve months ended
December 31, 2006, the Company made a $3,000 cash payment on the principal
amount of the note. This note is in default at December 31,
2008 and 2007.
|
38,000
|
38,000
|
|
Convertible
note payable in the amount of $80,000 to Brown Door, Inc., dated March 11,
2004. The note bears interest at the rate of 8% per annum, has no
provisions for a default or past due rate and was due in full on March 11,
2006. The note is convertible into common stock of the
Company at a conversion of $0.005 per share. A beneficial
conversion feature in the amount of $80,000 was recorded as a discount to
the note, and was amortized to interest expense during the twelve months
ended December 31, 2004, 2005, and 2006. Accrued interest is convertible
by the holder into common stock of the Company at maturity of the note at
a price of $0.005 per share. Interest in the amount of $6,420 and
$6,403 was accrued on this note during the twelve months ended December
31, 2008, and 2007, respectively. This note is in default at
December 31, 2008 and 2007.
|
80,000
|
80,000
|
|||
|
Convertible
note payable in the amount of $50,000 to Whalehaven Capital Fund, Ltd.
(“Whalehaven Capital”) dated February 25, 2005. We did not meet certain of
our obligations under the loan documents relating to this
issuance. These lapses include not reserving the requisites
numbers of treasury shares, selling subsequent securities without offering
a right of first refusal, not complying with reporting obligations, not
having our common shares quoted on the OTC:BB and not timely registering
certain securities. This note is in technical default as of May
16, 2005. The note originally carried interest at
the rate of 8% per annum, and was due in full on February 24, 2007. Upon
default, the note’s interest rate increased to 15% per annum, and the note
became due immediately. The note is convertible into common stock of the
Company at a conversion of $0.005 per share. A beneficial
conversion feature in the amount of $50,000 was recorded as a discount to
the note, and was amortized to interest expense when the note entered
default status in May, 2005. Accrued interest is convertible
into common stock of the Company at a price of $0.005 per
share. Interest in the amount of $6,019 and $6,002
was accrued on this note during the twelve months ended December 31, 2008
and 2007, respectively. During the twelve months ended December
31, 2006, $10,000 of principal and $589 of accrued interest was converted
into common stock. This note is in default at December
31, 2008 and 2007.
|
40,000
|
40,000
|
|||
|
Convertible
note payable in the amount of $50,000 to Oppenheimer & Co., /
Custodian for Joel Gold IRA, a related party, dated March 14, 2004. The
note bears interest at the rate of 8% per annum, has no provisions for a
default or past due rate and was due in full on October 12, 2006. The note
is convertible into common stock of the Company at a conversion
of $0.005 per share. A beneficial conversion feature in the amount of
$50,000 was recorded as a discount to the note, and was amortized to
interest expense during the twelve months ended December 31, 2004, 2005,
and 2006. Accrued interest is convertible into common stock of
the Company at a price of $0.005 per share. Interest in the amount of
$4,014 and $4,003 was accrued on this note during the twelve
months ended December 31, 2008, and 2007, respectively. This note is in
default at December 31, 2008 and 2007.
|
50,000
|
50,000
|
|||
|
Convertible
note payable in the original amount of $30,000 to Huo Hua dated May 9,
2005. The note bears interest at the rate of 8% per annum, has no
provisions for a default or past due rate and was due in full on October
12, 2006. The note is convertible into common stock of the
Company at a conversion of $0.005 per share . A beneficial
conversion feature in the amount of $30,000 was recorded as a discount to
the note, and was amortized to interest expense during the twelve months
ended December 31, 2005 and 2006. Accrued interest is convertible into
common stock of the Company at a price of $0.005 per
share. Interest in the amount of $1,607 and $1,603
was accrued on this note during the twelve months ended
December 31, 2008 and 2007, respectively. During the twelve months ended
December 31, 2006, the note holder converted $10,000 of principal into
common stock. This note is in default at December 31, 2008 and
2007.
|
20,000
|
20,000
|
|
Convertible
note payable in the amount of $25,000 to Joel Gold a board member and
related party, dated January 25, 2005. The note bears interest at the rate
of 8% per annum, has no provisions for a default or past due rate and was
due in full on January 25, 2007. The note is convertible into
common stock of the Company at a conversion of $0.025 per
share. A beneficial conversion feature in the amount of $25,000 was
recorded as a discount to the note, and was amortized to interest expense
during the twelve months ended December 31, 2005, 2006, and 2007. Accrued
interest is convertible into common stock of the Company at a price of
$0.025 per share. Interest in the amount of $2,005 and $1,999
was accrued on this note during the twelve months ended December 31, 2008
and 2007, respectively. This note is in default at December 31,
2008 and 2007.
|
25,000
|
25,000
|
|||
|
Convertible
note payable in the amount of $25,000 to The Jay & Kathleen Morren
Trust dated January 25, 2005. The note bears interest at the
rate of 6% per annum, has no provisions for a default or past due rate and
was due in full on January 25, 2007. The note is convertible
into common stock of the Company at a conversion of $0.005 per
share . A beneficial conversion feature in the amount of $25,000 was
recorded as a discount to the note, and was amortized to interest expense
during the twelve months ended December 31, 2005, 2006, and 2007. Accrued
interest is convertible into common stock of the Company at a price of
$0.005 per share. Interest in the amount of $1,500 and was $1,496 accrued
on this note during the twelve months ended December 31, 2008 and 2007,
respectively. This note is in default at December 31, 2008 and
2007.
|
25,000
|
25,000
|
|||
|
Convertible
note payable in the amount of $10,000 to Lauren M. Ferrone, a relative of
a board member and related party, dated October 12, 2004. The note bears
interest at the rate of 8% per annum, has no provisions for a default or
past due rate and was originally due in full on October 12, 2005. On
February 25, 2005, an amendment to the convertible notes was signed which
extended the term, which resulted in a new maturity date of October 12,
2006. The note is convertible into common stock of the
Company at a conversion of $0.01 per share . A beneficial
conversion feature in the amount of $10,000 was recorded as a discount to
the note, and was amortized to interest expense during the twelve months
ended December 31, 2004, 2005, and 2006. Accrued interest is convertible
into common stock of the Company at a price of $0.01 per share. Interest
in the amount of $804 and $801 was accrued on this note during
the twelve months ended December 31, 2008, and 2007,
respectively. This note is in default at
December 31, 2008 and 2007.
|
10,000
|
10,000
|
|||
|
Convertible
note payable in the amount of $10,000 to Richard D. Ferrone, a relative of
a board member and related party, dated October 12, 2004. The note bears
interest at the rate of 8% per annum, has no provisions for a default or
past due rate and was originally due in full on October 12, 2005. On
February 25, 2005, an amendment to the convertible notes was signed which
extended the term, which resulted in a new maturity date of October 12,
2006. The note is convertible into common stock of the
Company at a conversion of $0.01 per share . A beneficial
conversion feature in the amount of $10,000 was recorded as a discount to
the note, and was amortized to interest expense during the twelve months
ended December 31, 2004, 2005, and 2006. Accrued interest is convertible
into common stock of the Company at a price of $0.01 per share. Interest
in the amount of $804 and $801 was accrued on this note during
the twelve months ended December 31, 2008, and 2007,
respectively. . This note is in default at
December 31, 2008 and
2007.
|
10,000
|
10,000
|
|
Convertible
note payable in the amount of $10,000 to Christian D. Ferrone, a relative
of a board member and related party, dated October 12, 2004. The note
bears interest at the rate of 8% per annum, has no provisions
for a default or past due rate and was originally due in full on October
12, 2005. On February 25, 2005, an amendment to the convertible notes was
signed which extended the term, which resulted in a new maturity date of
October 12, 2006. The note is convertible into common stock of the
Company at a conversion of $0.01 per share . A beneficial
conversion feature in the amount of $10,000 was recorded as a discount to
the note, and was amortized to interest expense during the twelve months
ended December 31, 2004, 2005, and 2006. Accrued interest is convertible
into common stock of the Company at a price of $0.01 per share. Interest
in the amount of $804 and $801 was accrued on this note during
the twelve months ended December 31, 2008, and 2007, respectively.
This note is in default and December 31, 2008 and
2007.
|
10,000
|
10,000
|
|||
|
Convertible
note payable in the amount of $10,000 to Andrew I. Ferrone, a relative of
a board member and related party, dated October 12, 2004. The note bears
interest at the rate of 8% per annum, has no provisions for a default or
past due rate and was originally due in full on October 12, 2005. On
February 25, 2005, an amendment to the convertible notes was signed which
extended the term, which resulted in a new maturity date of October 12,
2006. The note is convertible into common stock of the
Company at a conversion of $0.01 per share . A beneficial
conversion feature in the amount of $10,000 was recorded as a discount to
the note, and was amortized to interest expense during the twelve months
ended December 31, 2004, 2005, and 2006. Accrued interest is convertible
into common stock of the Company at a price of $0.01 per share. Interest
in the amount of $804 and $801 was accrued on this note during
the twelve months ended December 31, 2008, and 2007,
respectively. This note is in default at December 31,
2008 and 2007.
|
10,000
|
10,000
|
|||
|
Convertible
note payable in the amount of $8,000 to Adrian Neilan dated March 11,
2004. The note bears interest at the rate of 8% per annum, has no
provisions for a default or past due rate and is due in full on October
12, 2006. The note is convertible into common stock of the
Company at a conversion of $0.005 per share. A beneficial
conversion feature in the amount of $8,000 was recorded as a discount to
the note, and was amortized to interest expense during the twelve months
ended December 31, 2004, 2005, and 2006. Accrued interest is convertible
into common stock of the Company at a price of $0.005 per share. Interest
in the amount of $641 and $639 was accrued on this note during the twelve
months ended December 31, 2008, and 2007, respectively.
|
8,000
|
8,000
|
|||
|
Convertible
note payable in the amount of $5,000 to Matthias Mueller dated March 11,
2004. The note bears interest at the rate of 8% per annum, has no
provisions for a default or past due rate and was due in full on October
12, 2006. The note is convertible into common stock of the
Company at a conversion of $0.005 per share . A beneficial
conversion feature in the amount of $5,000 was recorded as a discount to
the note, and was amortized to interest expense during the twelve months
ended December 31, 2004, 2005, and 2006. Accrued interest is convertible
into common stock of the Company at a price of $0.005 per share. Interest
in the amount of $402 and $401 was accrued on this note during
the twelve months ended December 31, 2008, and 2007,
respectively.
|
5,000
|
5,000
|
|||
|
Convertible
note payable in the amount of $120,000 to Alpha Capital dated August 25,
2005. We did not meet certain of our obligations under the loan documents
relating to this issuance. These lapses include not reserving
the requisite number of treasury shares, selling subsequent securities
without offering a right of first refusal, not complying with reporting
obligations, not having our common shares quoted on the OTC:BB and not
timely registering certain securities. This note is in
technical default as of November 13, 2005. The note originally
carried interest at the rate of 8% per annum, and was due in
full on August 25, 2007. Upon default, the note’s interest rate increased
to 15% per annum and the note became immediately due. The note is
convertible into common stock of the Company at a conversion of
$0.005 per share . A beneficial conversion feature in the amount of
$120,000 was recorded as a discount to the note, and was amortized to
interest expense when the note entered default status in November 2005.
Accrued interest is convertible into common stock of the Company at a
price of $0.005 per share . Interest in the amount of
$18,049 and $18,000 was accrued on this note during the twelve
months ended December 31, 2008 and 2007, respectively. This note is
in default at December 31, 2008 and 2007.
|
120,000
|
120,000
|
|||
|
Convertible
note payable in the amount of $30,000 to Whalehaven Capital dated August
25, 2005. We did not meet certain of our obligations under the
loan documents relating to this issuance. These lapses include
not reserving the requisite number of treasury shares, selling subsequent
securities without offering a right of first refusal, not complying with
reporting obligations, not having our common shares quoted on the OTC:BB
and not timely registering certain securities. This note was in
technical default as of November 13, 2005. The note originally
carried interest at the rate of 8% per annum, and was due in
full on August 25, 2007. Upon default, the note’s interest rate increased
to 15% per annum and the note became immediately due. The note is
convertible into common stock of the Company at a conversion of
$0.005 per share. A beneficial conversion feature in the amount of $30,000
was recorded as a discount to the note, and was amortized to interest
expense when the note entered default status in November
2005. . Accrued interest is convertible into common stock of
the Company at a price of $0.005 per share . Interest in the amount of
$4,512 and $4,599 was accrued on this note during the twelve
months ended December 31, 2008 and 2007, respectively. This
note is in default at December 31, 2008 and 2007.
|
30,000
|
30,000
|
|||
|
Convertible
note payable in the original amount of $25,000 to Asher Brand, dated
August 25, 2005. We did not meet certain of our obligations under the loan
documents relating to this issuance. These lapses include not
reserving the requisite number of treasury shares, selling subsequent
securities without offering a right of first refusal, not complying with
reporting obligations, not having our common shares quoted on the OTC:BB
and not timely registering certain securities. This note was in
technical default as of November 13, 2005. The note originally
carried interest at the rate of 8% per annum, and was due in
full on August 25, 2007. Upon default, the note’s interest rate increased
to 15% per annum and the note became immediately due The note is
convertible into common stock of the Company at a conversion of
$0.005 per share . A beneficial conversion feature in the amount of
$25,000 was recorded as a discount to the note, and was amortized to
interest expense when the note entered default status in November, 2005.
Accrued interest is convertible into common stock of the Company at a
price of $0.005 per share Interest in the amount of $3,382 and
$3,452 was accrued on this note during the twelve months ended
December 31, 2008 and 2007, respectively. During the
twelve months ended December 31, 2006, the holder of the note
converted $2,000 of principal and $3,667 of accrued interest into common
stock, and during the twelve months ended December 31, 2008, the holder of
the note converted an additional $3,000 of principal into common
stock. This note is in default at December 31, 2008 and
2007.
|
20,000
|
23,000
|
|||
|
Convertible
note payable in the original amount of $25,000 to Momona Capital, dated
August 25, 2005. We did not meet certain of our obligations under the loan
documents relating to this issuance. These lapses include not
reserving the requisite number of treasury shares, selling subsequent
securities without offering a right of first refusal, not complying with
reporting obligations, not having our common shares quoted on the OTC:BB
and not timely registering certain securities. This note was in
technical default at November 13, 2005. The note originally
carried interest at the rate of 8% per annum, and was due in
full on August 25, 2007. Upon default, the note’s interest rate increased
to 15% per annum and the note became immediately due The note is
convertible into common stock of the Company at a conversion of
$0.005 per share . A beneficial conversion feature in the amount of
$25,000 was recorded as a discount to the note, and was amortized to
interest expense when the note entered default status in November 2005.
Accrued interest is convertible into common stock of the Company at a
price of $0.005 per share. Interest in the amount of $3,355 and $3,452 was
accrued on this note during the twelve months ended December 31, 2008 and
2007, respectively During the twelve months ended December 31, 2006, the
holder of the note converted $2,000 of principal and $3,667 of accrued
interest into common stock, and during the twelve months need December 31,
2008, the holder of the note converted an additional $5,000 principal into
common stock. This note is in default at December 31, 2008 and
2007.
|
18,000
|
23,000
|
|||
|
Convertible
note payable in the amount of $10,000 to Lane Ventures dated August 25,
2005. We did not meet certain of our obligations under the loan documents
relating to this issuance. These lapses include not reserving
the requisite number of treasury shares, selling subsequent securities
without offering a right of first refusal, not complying with reporting
obligations, not having our common shares quoted on the OTC:BB and not
timely registering certain securities. This note was in
technical default at November 13, 2005. The note originally
carried interest at the rate of 8% per annum, and was due in
full on August 25, 2007. Upon default, the note’s interest rate increased
to 15% per annum and the note became immediately due. The note is
convertible into common stock of the Company at a conversion of
$0.005 per share . A beneficial conversion feature in the amount of
$10,000 was recorded as a discount to the note, and was amortized to
interest expense when the note entered default status in November,
2005. Accrued interest is convertible into common stock of the
Company at a price of $0.005 per share. Interest in the amount of $900 and
$897 was accrued on this note during the twelve months ended
December 31, 2008 and 2007, respectively. During the
twelve months ended December 31, 2006, the holder of the note converted
$4,000 of principal and $1,467 of accrued interest into common
stock. This note is in default at December 31, 2008 and
2007.
|
6,000
|
6,000
|
|||
|
Note
payable in the amount of $120,000 to Alpha Capital, dated February 7,
2006. The originally carried interest at the rate of 15% per annum, and
was originally due in full on February 7, 2007. The Company was not in
compliance with various terms of this note, including making timely
payments of interest, and this note was in technical default at May 8,
2006. At this time, the interest rate increased to 20% and the note became
immediately due and payable. During the three months ended September 30,
2007, the Company extended the due date of the notes one year, to October
31, 2007; at the same time, the Company added a convertibility feature,
allowing the noteholders to convert the notes and accrued interest into
common stock of the Company at a rate of $0.005 per share. This note
entered technical default on October 31, 2007. The Company
recorded a discount to this note for the fair value of the conversion
feature in the amount of $95,588 and amortized this discount to interest
expense when the note entered default status in October 2007.
On
March 12, 2008, the Company extended this note to March 4,
2009. As consideration for the extension of this notes, the
Company issued five-year warrants as follows: warrants to purchase
24,000,000 shares of common stock at $0.0115 per share; 6,000,000shares of
common stock at $0.011 per share; and 2,400,000 shares of common stock at
$0.005 per share. These warrants were valued via the Black-Scholes
valuation method at an aggregate amount of $126,465. This transaction was
accounted for as an extinguishment of debt, and a loss
of $126,465 was charged to operations during the twelve months
ended December 31, 2008. Interest in the amount of
$24,065 and $23,999 was accrued on this note during the twelve
months ended December 31, 2008 and 2007,
respectively.
|
120,000
|
120,000
|
|||
|
Note
payable in the amount of $30,000 to Whalehaven Capital dated February 7,
2006. The note originally carried interest at the rate of 15%
per annum, and was due in full on February 7, 2007. The Company was not in
compliance with various terms of this note, including making timely
payments of interest, and this note was in technical default at May 8,
2006. At this time, the interest rate increased to 20% and the note became
immediately due and payable. During the three months ended
September 30, 2007, the Company extended the due date of the notes one
year, to October 31, 2007; at the same time, the Company added a
convertibility feature, allowing the noteholders to convert the notes and
accrued interest into common stock of the Company at a rate of $0.005 per
share. This note entered technical default on October 31,
2007. The Company recorded a discount to this note for the fair
value of the conversion feature in the amount of $23,897 and amortized
this discount to interest expense when the note entered default status in
October 2007. On March 12, 2008, the Company
extended this note to March 4, 2009. As consideration for the
extension of this notes, the Company issued five-year warrants
as follows: warrants to purchase 6,000,000 shares of common stock at
$0.0115 per share; 1,500,000 shares of common stock at $0.011 per share;
and 600,000 shares of common stock at $0.005 per share. These warrants
were valued via the Black-Scholes valuation method at an aggregate amount
of $31,616. This transaction was accounted for as an extinguishment of
debt, and a loss of $31,616 was charged to operations during
the twelve months ended December 31, 2008. Interest in the
amount of $4,512 and $4,497 was accrued on this note during the
twelve months ended December 31, 2008 and 2007,
respectively.
|
30,000
|
30,000
|
|
Note
payable in the amount of $75,000 to Michael Ferrone, dated August 2, 2004.
The note bears interest at the rate of 8% per annum, and was due in full
on February 2, 2005. On September 30, 2008, this note was
extended to December 31, 2009 in exchange for adding a convertibility
feature to the note. This feature allows for conversion to common stock at
a price of $0.005 per share. The Company valued this beneficial conversion
feature at the amount of $89,945 using the Black-Scholed valuation
model. $75,000 of this amount was charged to discount on the
note; $4,001 of this discount was amortized to interest expense during the
year ended December 31, 2008. The balance of the beneficial conversion
feature in the amount of $14,945 was charged to interest
expense during the year ended December 31, 2008. Interest in
the amount of $6,019 and $6,002 was accrued on this
note during the twelve months ended December 31,
2008, and 2007, respectively
|
75,000
|
75,000
|
|||||
|
Twenty-six convertible
notes payable in the amount of $4,500 each to Sam Klepfish, the Company’s
CEO and a related party, dated the first of the month beginning on
November 1, 2006, pursuant to the Company’s employment agreement with Mr.
Klepfish, the amount of $4,500 in salary is accrued each month to a note
payable. These notes bear interest at the rate of 8% per annum and have no
due date. These notes and accrued interest are convertible into common
stock of the Company at a rate of $0.005 per share. Beneficial
conversion features in the aggregate amount of $9,000 for the year ended
December 31, 2006, $39,190 for the year ended December 31, 2007,
and $58,464 for the year ended December 31, 2008 for calculated
using the Black-Scholes valuation model. Since
these notes are payable on demand, the value of these discounts
were charged immediately to interest
expense. Interest in the aggregate amount of
$7,171 and $2,982 was accrued on these notes during the twelve
months ended December 31, 2008 and 2007, respectively.
|
117,000
|
63,000
|
|||||
|
Note
payable in the amount of $10,000 to Alpha Capital, dated May 19, 2006. The
originally carried interest at the rate of 15% per annum, and was
originally due in full on November 19, 2006. The Company is not in
compliance with various terms of this note, including making timely
payments of interest, and this note was in technical default at February
20 2006. At this time, the interest rate increased to 20% and the note
became immediately due and payable. During the three months ended
September 30, 2007, the Company extended the due date of the notes one
year, to October 31, 2007; at the same time, the Company added a
convertibility feature, allowing the noteholders to convert the notes and
accrued interest into common stock of the Company at a rate of $0.005 per
share. This note entered technical default on October 31, 2007. The
Company recorded a discount to this note for the fair value of the
conversion feature in the amount of $7,966 and amortized this discount to
interest expense when the note entered default status in October
2007. On March 12, 2008, the Company extended this note to
March 4, 2009. As consideration for the extension of this
notes, the Company issued five-year warrants as follows: warrants to
purchase 2,000,000 shares of common stock at $0.0115 per share; 500,000
shares of common stock at $0.011 per share; and 200,000 shares of common
stock at $0.005 per share. These warrants were valued via the
Black-Scholes valuation method at an aggregate amount of $10,539. This
transaction was accounted for as an extinguishment of debt, and a loss
of $10,539 was charged to operations during the twelve months
ended December 31, 2008. Interest in the amount of
$2,005 and $1,999 was accrued on this note during the twelve
months ended December 31, 2008 and 2007,
respectively.
|
10,000
|
10,000
|
|||||
|
Twelve
one-year notes payable in the amount of $1,500 each for an aggregate
amount of $18,000 to Mountain Marketing, for services. A note
in the amount of $1,500 is dated as of the last day of each month of the
year ended December 31, 2008. These notes are convertible into common
stock of the Company at the rate of $0.005 per share. Discounts
in the aggregate amount of $15,664 were amortized to interest during the
year ended December 31, 2008. These notes do not bear
interest.
|
18,000
|
--
|
|||||
|
Note
payable in the original amount of $25,787 to Microsoft Corporation dated
May 3, 2006. The note bears interest at the rate of 9.7% per
annum, and is payable in 60 monthly payments of $557 beginning October 1,
2006. Negative interest in the amount of
$2,269 and $1,263 was capitalized to this note
during the twelve months ended December 31, 2008 and 2007,
respectively. Principal and interest in the amounts of $6,690
and $4,421 were paid on this note during the twelve months ended December
31, 2008 and 2007, respectively.
|
16,087
|
20,953
|
|||||
|
Convertible
note payable in the amount of $200,000 to Alpha Capitol, dated
December 31, 2008. This note bears interest at the rate of 8%
per annum, and is due in full on December 31, 2009. Principal
and accrued interest is convertible into common stock of the Company at
the rate of $0.005 per share. Also issued with this note are
warrants to purchase 40,000,000 shares of the Company’s common stock at a
price of $0.005 per share. The Company calculated a discount to
the note in the amount of $200,000, and recorded no amortization for this
discount during the year ended December 31, 2008 as the note was dated the
last day of the year. Amortization of the discount will begin in January,
2009. During the year ended December 31, 2008, the
Company recorded no interest on this note.
|
200,000
|
--
|
|||||
|
$
|
1,481,087 | $ | 1,221,953 |
|
Note
|
Unamortized
|
Net
of
|
||||||||||
|
December
31, 2008:
|
Amount
|
Discounts
|
Discount
|
|||||||||
|
Notes
payable - current portion
|
$ | 938,364 | $ | - | $ | 938,364 | ||||||
|
Notes
payable - related parties, current portion
|
332,000 | (70,998 | ) | 261,002 | ||||||||
|
Notes
payable
|
210,723 | (200,000 | ) | 10,723 | ||||||||
|
Total
|
$ | 1,481,087 | $ | (270,998 | ) | $ | 1,210,089 | |||||
|
Note
|
Unamortized
|
Net
of
|
||||||||||
|
December
31, 2007:
|
Amount
|
Discounts
|
Discount
|
|||||||||
|
Notes
payable - current portion
|
$ | 927,870 | $ | - | $ | 927,870 | ||||||
|
Notes
payable - related parties, current portion
|
278,000 | - | 278,000 | |||||||||
|
Notes
payable
|
16,083 | - | 16,083 | |||||||||
|
Total
|
$ | 1,221,953 | $ | - | $ | 1,221,953 | ||||||
|
Twelve
months ended
|
||||||||
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Discount
on Notes Payable amortized to interest expense:
|
$ | 78,137 | $ | 181,952 | ||||
Conversion Options Embedded
in Convertible Notes
The
Company accounts for conversion options embedded in convertible notes in
accordance with SFAS No. 133 ‘‘Accounting for Derivative Instruments and Hedging
Activities’’ and EITF 00-19 ‘‘Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock.’’ SFAS 133
generally requires companies to bifurcate conversion options embedded in
convertible notes from their host instruments and to account for them as free
standing derivative financial instruments in accordance with EITF
00-19.
At
December 31, 2008 and 2007, the Company
had outstanding $1,465,000 and $1,126,000 in principal,
respectively, of various convertible notes with embedded conversion options
accounted for as free standing derivative financial instruments in accordance
with SFAS 133 and EITF 00-19. The fair value of these embedded
conversion options was $1,150,000 and $612,134 at December 31, 2008 and 2007,
respectively. The fair value of these embedded conversion options
were estimated at December 31, 2008 using the Black-Scholes option pricing model
with the following assumptions: risk free interest rate of 0.27%;
expected dividend yield of 0%; expected option life of 10; and
volatility of 332.67%. The fair value of these embedded conversion
options were estimated at December 31, 2007 using the Black-Scholes option
pricing model with the following assumptions: risk free interest rate
of 4.25%; expected dividend yield of 0%; expected option life of 10;
and volatility of 194.46%. The expected term of 10 years was used for
all notes in both periods because several of the notes are currently or have
been in default, and accordingly the term of the note is deemed not relevant as
a variable for the Black-Scholes calculation. The Company revalues
the conversion options at each reporting period, and charges any change in value
to operations. During the years ended December 31, 2008 and 2007, the Company
recorded a loss of $182,583 and a gain of $11,098, respectively, due to the
change in value of the conversion option liability.
When
convertible notes payable are satisfied by payment or by conversion to equity,
the Company revalues the related conversion option liability at the time of the
payment or conversion. The conversion option liability is then
relieved by this amount, which is charged to additional paid-in
capital. During the years ended December 31, 2008 and 2007,
conversion option liabilities in the amounts of $149,747 and $8,800 were
transferred from liability to equity due to the conversion or payment
of the related convertible notes payable.
Discounts on notes
payable
The
Company calculates the fair value of any beneficial conversion features embedded
in its convertible notes via the Black-Scholes valuation method. The Company
also calculates the fair value of any detachable warrants offered with its
convertible notes via the Black-Scholes valuation method. The
instruments are considered discounts to the notes, to the extent the aggregate
value of the warrants and conversion features do not exceed the face value of
the notes. These discounts are amortized to interest expense via the effective
interest method over the term of the notes. The fair value of these
instruments is expensed as original issue discount to the extent that the value
of these instruments exceeds the face value of
the notes.
Extension of notes
payable
The
Company accounts for modifications of its notes payable according to the
guidance in EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of
Debt Instruments” (“EITF 96-19”) and EITF 06-6, “Debtor’s Accounting for a
Modification (or Exchange) of Convertible Debt Instruments” (“EITF
06-6”). Pursuant to EITF 96-19, changes to an existing note should be
accounted for as an extinguishment of the note with resultant gain or loss if
the present value of the cash flows from the new note vary by more
than 10% from the present value of the cash flows from the original
note. EITF 06-6 provides an exception to this rule for the addition
of conversion options accounted for as a derivative liability.
During
the year ended December 31, 2007, the Company negotiated the extension of three
of its notes payable in the aggregate amount of $160,000. As
consideration for the extension, the Company agreed to add a convertibility
feature to the notes. Because this note falls under the exception in
EITF 06-6 regarding the addition of conversion options accounted for as a
derivative liability, the Company accounted for this transaction as a
modification of the existing note. The conversion option liability was valued at
the amount of $127,450 at the date of the issuance of the extension via the
Black-Scholes method. This amount was debited to discount on notes payable, and
is being amortized via the effective interest method over the extended term of
the related notes.
During
the year ended December 31, 2008, the Company negotiated the further extension
of these three notes payable in the aggregate amount of $160,000. As
consideration for the extension, the Company provided warrants to purchase an
aggregate 43,200,000 shares of common stock. The Company valued these
warrants at the date of issuance via the Black-Scholes valuation method at
$168,620. The value of these warrants are considered a component of
the 10% present value calculation under EITF 96-19. The Company accounted for
this transaction as an extinguishment of debt, and recorded a loss on
extinguishment in the amount of $168,620. This amount was charged to
operations during the year ended December 31, 2008.
Embedded conversion features
of notes payable:
The
Company accounts for conversion options embedded in convertible notes in
accordance with SFAS No. 133 ‘‘Accounting for Derivative Instruments and Hedging
Activities’’ and EITF 00-19 ‘‘Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock.’’ SFAS 133
generally requires companies to bifurcate conversion options embedded in
convertible notes and preferred shares from their host instruments and to
account for them as free standing derivative financial instruments in accordance
with EITF 00-19.
The
Company values embedded conversion features utilizing the Black-Scholes
valuation model. Conversion options are valued upon issuance, and
re-valued at each financial statement reporting date. Any change in
value is charged to income or expense during the period. The
following table illustrates certain key information regarding our conversion
option valuation assumptions at December 31, 2008 and
2007:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Number
of options outstanding
|
285,000,000 | 217,200,000 | ||||||
|
Value
at December 31
|
$ | 1,388,287 | $ | 431,188 | ||||
|
Number
of options issued during the year
|
69,400,000 | 42,800,000 | ||||||
|
Value
of options issued during the year
|
$ | 364,079 | $ | 166,640 | ||||
|
Number
of options exercised or underlying
|
||||||||
|
notes
paid during the year
|
1,600,000 | 32,000,000 | ||||||
|
Value
of options exercised or underlying
|
||||||||
|
notes
paid during the year
|
$ | 8,800 | $ | 149,747 | ||||
|
Revaluation
gain (loss) during the year
|
$ | (182,583 | ) | $ | 11,098 | |||
|
Black-Scholes
model variables:
|
||||||||
|
Volatility
|
193.7%
to 332.7
|
% |
146.4%
to 194.5
|
% | ||||
|
Dividends
|
0 | 0 | ||||||
|
Risk-free
interest rates
|
0.27% - 2.41 | % | 3.37% - 5.16 | % | ||||
|
Term
(years)
|
1.00 - 10.00 | 10.00 – 10.00 | ||||||
8. RELATED
PARTY TRANSACTIONS
Twelve
months ended December 31, 2008:
The
Company issued twelve convertible notes payable in the aggregate amount of
$54,000 for additional salary due to the Company’s Chief Executive
Officer;
The
Company added a convertibility feature valued at $75,000 to a note payable to a
board member in the amount of $75,000 as consideration for extending the term of
the note to December 31, 2009;
The
Company issued options to purchase 20,000,000 shares of common stock
at a price of $0.007 per share to officers and directors.
The
Company committed to issue 3,000,000 shares of common stock to the Company’s
President as a bonus for past service. As of December 31, 2008, the
fair value of these shares in the amount of $24,000 was charged to
operations. As of December 31, 2008 these share have not been issued
and are shown on the balance sheet in accrued liabilities-related
parties.
Twelve
months ended December 31, 2007:
The
Company issued twelve convertible notes payable in the aggregate
amount of $54,000 to its Chief Executive Officer for additional
salary.
9.
PENALTY FOR LATE REGISTRATION OF SHARES
During
the twelve months ended December 31, 2008 and 2007, the Company accrued
liabilities for the issuance of 0 and 22,760,000, respectively (the
“Penalty Shares”) of the Company’s stock pursuant to a penalty calculation with
regard to the late registration of shares underlying convertible notes
payable. At December 31, 2008 and 2007, there were a total of
110,280,000 Penalty Shares issuable. The Company charged to
operations $0 and $64,984 during the twelve months ended December 31, 2008 and
2007, respectively, representing the fair values of the Penalty Shares
accrued. During the twelve months ended
December 31, 2008 and 2007, the Company revalued these
110,280,000 Penalty Shares . This resulted
in losses of $ 220,564 and $3,296, respectively. The
liability carried on the Company’s balance sheets at December 31, 2008 and 2007
representing the value of the Penalty Shares is $551,400 and $330,840,
respectively.
The
registration rights which triggered the accrual of the penalty shares expired on
November 27, 2008. At December 31, 2008, the Company has accrued the
maximum number of shares issuable under the registration rights
agreement.
Except
for the penalties disclosed above for not registering the shares of common stock
underlying certain convertible notes, there are no circumstances that would
require the Company to transfer any consideration to the note
holders.
10.
INCOME TAXES
Deferred
income taxes result from the temporary differences arising from the use of
accelerated depreciation methods for income tax purposes and the straight-line
method for financial statement purposes, and an accumulation of Net Operating
Loss carryforwards for income tax purposes with a valuation allowance against
the carryforwards for book purposes.
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Included in deferred tax assets are Federal State net
operating loss carryforwards of approximately $2,420,000, which will expire
beginning in 2028. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon our cumulative
losses through December 31, 2008, we have provided a valuation allowance
reducing the net realizable benefits of these deductible differences to $0 at
December 31, 2008. The amount of the deferred tax asset considered
realizable could change in the near term if projected future taxable income is
realized. Due to significant changes in the Company's ownership, the
Company's future use of its existing net operating losses may be
limited.
The
income tax provision (benefit) for the twelve months ended December 31, 2008
and 2007 consists of the following:
|
December 31,
2008
|
December
31, 2007
|
||||||
|
Current
|
|||||||
|
Federal
|
$ | -- | $ | -- | |||
|
State
|
-- | -- | |||||
| -- | -- | ||||||
|
Deferred
|
|||||||
|
Federal
|
-- | -- | |||||
|
State
|
-- | -- | |||||
| -- | -- | ||||||
| $ | -- | $ | -- | ||||
A
reconciliation between the actual income tax expense and income taxes computed
by applying the statutory Federal and state income tax rates to income from
continuing operations before income taxes is as follows:
|
Twelve
Months Ended December 31, 2008
|
Twelve
Months Ended December 31, 2007
|
|||||||
|
Computed
“expected” income tax expense at
approximately
34%
|
$ | (818,000 | ) | $ | (645,000 | ) | ||
|
Increase
(decrease) in NOL carryforwards
|
818,000 | 645,000 | ||||||
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of our deferred
tax assets and liabilities as of December 31, 2008 and 2007 are as
follows:
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss
|
$ | 2,100,000 | $ | 1,530,000 | ||||
|
Allowance
and accruals not recognized for income tax
purposes
|
- | - | ||||||
|
Total
gross deferred tax assets
|
2,100,000 | 1,530,000 | ||||||
|
Less
: Valuation allowance
|
(2,100,000 | ) | (1,530,000 | ) | ||||
|
Net
deferred tax assets
|
$ | 0 | $ | 0 | ||||
|
Deferred
tax liabilities:
|
||||||||
|
Total
gross deferred tax liabilities:
|
||||||||
|
Depreciation
and amortization, net
|
(14,000 | ) | (12,000 | ) | ||||
|
Deferred
state tax liability
|
- | - | ||||||
|
Total
net deferred tax liabilities
|
$ | (14,000 | ) | $ | (12,000 | ) | ||
These
amounts have been presented in the consolidated balance sheets as
follows:
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
Current
deferred tax asset
|
$ | - | $ | - | ||||
|
Non
current deferred tax asset
|
- | |||||||
|
Non
current deferred tax liability
|
- | - | ||||||
|
Total
net deferred tax asset
|
$ | - | $ | |||||
11. COMMON
STOCK
During
the twelve months ended December 31, 2007, the Company cancelled 5,573,158
shares of common stock which were issued but not outstanding. These
shares were issued in 2006 pursuant to the conversion of notes and accrued
interest into shares of common stock, and were mistakenly issued twice in 2006.
The entry for the second issuance in 2006 was a charge to additional paid-in
capital for the par value of these shares, or $557. The entry made for the
cancellation of these shares in 2007 was a credit to additional paid-in capital
in the amount of $557.
During
the year ended December 31, 2007, the Company issued 10,000,000 shares of common
stock in anticipation of an acquisition which was never consummated. At December
31, 2007 and 2008, these shares were being held by the Company’s
chief executive officer, and are recorded as issued but not outstanding on the
Company’s balance sheet.
During
the twelve months ended December 31, 2007, the Company also had the following
transactions:
The
Company issued 3,250,000 shares of common stock for an employee
bonuses. The fair value of these shares in the amount of $8,125 was
charged to operations during the year ended December 31, 2007.
The
Company issued 800,000 shares of common stock for the conversion of $4,000 of
accrued interest on a note payable.
The
Company issued 32,000,000 shares of common stock for the conversion of $160,000
of principal of a note payable.
During
the year ended December 31, 2008, the Company had the following
transactions:
The
Company issued 1,789,400 shares of common stock for the conversion of a note
payable and accrued interest in the amount of $8,947.
The
Company committed to issue 3,000,000 shares of common stock to the Company’s
President as a bonus for past service. As of December 31, 2008, the
fair value of these shares in the amount of $24,000 was charged to
operations. As of December 31, 2008 these share have not been issued
and are shown on the balance sheet in accrued liabilities-related
parties.
The
Company committed to issue 5,000,000 shares of common stock to a consultant for
services. During the year ended December 31, 2008, the Company
charged to operations the fair value of these shares in the amount of
$10,000. As of December 31, 2008, these shares have not been issued
and are shown on the balance sheet in accrued liabilities.
Warrants
The
following table summarizes the significant terms of warrants outstanding at
December 31, 2008 . These warrants may be settle in cash or via cashless
conversion into shares of the Company’s common stock at the request of the
warrant holder. These warrants were granted as part of a financing
agreement:
|
Weighted
|
Weighted
|
||||||||||||||||||||
|
Weighted
|
average
|
average
|
|||||||||||||||||||
|
average
|
exercise
|
exercise
|
|||||||||||||||||||
|
Range
of
|
Number
of
|
remaining
|
price
of
|
Number
of
|
price
of
|
||||||||||||||||
|
exercise
|
shares
|
contractual
|
outstanding
|
shares
|
exercisable
|
||||||||||||||||
|
prices
|
outstanding
|
life
(years)
|
warrants
|
exercisable
|
options
|
||||||||||||||||
|
$
|
0.0050
|
179,700,000
|
2.06
|
$
|
0.0050
|
179,700,000
|
$
|
0.0050
|
|||||||||||||
|
$
|
0.0110
|
18,500,000
|
2,74
|
$
|
0.0110
|
18,500,000
|
$
|
0.0110
|
|||||||||||||
|
$
|
0.0120
|
1,000,000
|
4.74
|
$
|
0.0120
|
--
|
$
|
--
|
|||||||||||||
|
$
|
0.0115
|
74,000,000
|
2.74
|
$
|
0.0115
|
74,000,000
|
$
|
0.0115
|
|||||||||||||
|
273,200,000
|
2.30
|
$
|
0.072
|
272,200,000
|
$
|
0.071
|
|||||||||||||||
Transactions
involving warrants are summarized as follows:
|
Weighted
|
|||||||
|
Average
|
|||||||
|
Number
of
|
Exercise
|
||||||
|
Shares
|
Price
|
||||||
|
Warrants
exercisable at December 31, 2006
|
189,000,000
|
$
|
0.007
|
||||
|
Granted
|
-
|
-
|
|||||
|
Exercised
|
-
|
||||||
|
Cancelled
/ Expired
|
-
|
-
|
|||||
|
Warrants
exercisable at December 31, 2007
|
189,000,000
|
$
|
0.007
|
||||
|
Granted
|
84,200,000
|
0.008
|
|||||
|
Exercised
|
-
|
||||||
|
Cancelled
/ Expired
|
-
|
-
|
|||||
|
Warrants
outstanding at December 31, 2008
|
273,200,000
|
$
|
0.007
|
||||
|
Exercisable
|
272,200,000
|
$
|
0.007
|
||||
|
Not
exercisable
|
1,000,000
|
$
|
0.012
|
Options
In
December 2006, the Company agreed to issue 5,000,000 options with five year
terms to purchase additional shares of common stock to each of the Company’s
three directors, pursuant to a board resolution for services performed in 2006
(a total of 15,000,000 options). These options have no alternative settlement
provisions. The options were issued in April 2007. Compensation cost was
recognized via the straight-line attribution method.
In
January 2008, the Company agreed to issue 5,000,000 options with five year terms
to purchase additional shares of common stock to each of the Company’s three
directors and the Company’s President pursuant to a board resolution for
services performed (a total of 20,000,000 options). The options were issued in
January 2008. Compensation cost was recognized via the straight-line
attribution method as expensed to operations during the year ended December 31,
2008.
The
following table summarizes the changes outstanding and the related prices for
the shares of the Company’s common stock issued to employees of the
Company:
|
Weighted
|
Weighted
|
||||||||||||||||||||
|
Weighted
|
average
|
average
|
|||||||||||||||||||
|
average
|
exercise
|
exercise
|
|||||||||||||||||||
|
Range
of
|
Number
of
|
remaining
|
price
of
|
Number
of
|
price
of
|
||||||||||||||||
|
exercise
|
shares
|
contractual
|
outstanding
|
shares
|
exercisable
|
||||||||||||||||
|
prices
|
outstanding
|
life
(years)
|
options
|
exercisable
|
options
|
||||||||||||||||
|
$
|
0.005
|
15,000,000
|
2.89
|
$
|
0.005
|
15,000,000
|
$
|
0.005
|
|||||||||||||
|
$
|
0.007
|
20,000,000
|
4.25
|
$
|
0.007
|
20,000,000
|
$
|
0.007
|
|||||||||||||
|
$
|
0.500
|
500,000
|
0.38
|
$
|
0.500
|
400,000
|
$
|
0.500
|
|||||||||||||
|
35,500,000
|
3.62
|
$
|
0.009
|
35,400,000
|
$
|
0.008
|
|||||||||||||||
Options
not vested are not exercisable.
Transactions
involving stock options issued to employees are summarized as
follows:
|
Weighted
|
|||||||
|
Average
|
|||||||
|
Number
of
|
Exercise
|
||||||
|
Shares
|
Price
|
||||||
|
Options
exercisable at December 31, 2006
|
15,500,000
|
$
|
0.021
|
||||
|
Granted
|
-
|
-
|
|||||
|
Exercised
|
-
|
||||||
|
Cancelled
/ Expired
|
-
|
-
|
|||||
|
Options
outstanding at December 31, 2007
|
15,500,000
|
$
|
0.021
|
||||
|
Non-vested
at December 31, 2007
|
200,000
|
$
|
0.500
|
||||
|
Vested
at December 31, 2007
|
15,300,000
|
$
|
0.015
|
||||
|
Granted
|
20,000,000
|
$
|
0.007-
|
||||
|
Exercised
|
-
|
||||||
|
Cancelled
/ Expired
|
-
|
-
|
|||||
|
Options
outstanding at December 31, 2008
|
35,500,000
|
$
|
0.013
|
||||
|
Non-vested
at December 31, 2008
|
100,000
|
$
|
0.500
|
||||
|
Vested
at December 31, 2008
|
35,400,000
|
$
|
0.012
|
Accounting for warrants
and stock options
The
Company accounts for the issuance of common stock purchase warrants, stock
options, and other freestanding derivative financial instruments in accordance
with the provisions of EITF 00-19. Based on the provisions of EITF 00-19, the
Company classifies, as equity, any contracts that (i) require physical
settlement or net-share settlement or (ii) gives the Company a choice of
net-cash settlement or settlement in its own shares (physical settlement or
net-share settlement). The Company classifies as assets or liabilities any
contract that (i) require net-cash or (ii) give the counterparty a choice of
net-cash settlement in shares (physical or net-share settlement). At December
31, 2008 and 2007, the Company has no freestanding derivative
financial instruments that require net cash settlement or give the counterparty
a choice of net cash settlement or settlement in shares.
The fair
value of these warrants and stock options is determined utilizing the
Black-Scholes valuation model. Through August 2005, these warrants were
accounted for by the equity method, whereby the fair value of the warrants was
charged to additional paid-in capital. During September, 2005, the number of
shares of the Company's common stock issued and issuable exceeded the number of
shares of common stock the Company had authorized. As the Company no longer had
sufficient shares authorized to settle all of our outstanding contracts, this
triggered a change in the manner in which the Company accounts for the warrants
and stock options. The Company began to account for these
warrants and stock options utilizing the liability method. Pursuant
to EITF 00-19,"If a contract is reclassified from permanent or temporary equity
to an asset or a liability, the change in fair value of the contract during the
period the contract was classified as equity should be accounted for as an
adjustment to stockholders' equity." Accordingly, during the year ended December
31, 2005, the Company charged the amount of $10,374,536 to stockholders' equity.
At the same time, the Company changed the way in which it accounts for the
beneficial conversion feature of convertible notes payable (see note
8).
The
accounting guidance shows that the warrants and stock options which are a
derivative liability should be revalued each reporting period. The recorded
value of such warrants and stock options can fluctuate significantly based on
fluctuations in the market value of the underlying securities of the issuer of
the warrants and stock options, as well as in the volatility of the stock price
during the term used for observation and the term remaining for warrants. During
the twelve months ended December 31, 2008 and 2007, the Company
recognized losses of $582,541 and $19,116, respectively, for the increase in the
fair value of the warrant liability and recorded the losses in
operations during the twelve months ended December 31, 2008 and
2007. During the twelve months ended December 31, 2008 and
2007, the Company recognized a loss of $138,313 and a gain of $5,717,
respectively, for the change in the fair value of the stock option liability and
recorded these amounts in operations during the twelve months ended December 31,
2008 and 2007.
The
Company valued warrants using the Black-Scholes valuation model utilizing the
following variables:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Volatility
|
203.6% - 332.7 | % | 178.2% - 194.5 | % | ||||
|
Dividends
|
$ | 0 | $ | 0 | ||||
|
Risk-free
interest rates
|
0.27% - 2.41 | % | 3.49% - 5.06 | % | ||||
|
Term
(years)
|
1.15 - 5.00 | 2.15 - 4.13 | ||||||
The
Company valued stock options using the Black-Scholes valuation model utilizing
the following variables:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Black-Scholes
model variables:
|
||||||||
|
Volatility
|
203.7%
to 332.7%
|
178.3%
to 194.5%
|
||||||
|
Dividends
|
$ | 0 | $ | 0 | ||||
|
Risk-free
interest rates
|
0.27% - 2.41 | % | 3.09% - 5.06 | % | ||||
|
Term
(years)
|
0.37 - 5.00 | 1.38 - 4.64 | ||||||
Insufficient Authorized but
Unissued Shares of Common Stock
The
Company has a potential obligation to issue 825,964,600 and
612,334,320 shares of common stock upon the conversion of convertible
notes and accrued interest, warrants and penalty shares issuable at December 31,
2008, and 2007, respectively. The Company had 183,577,038
and 181,787,638 shares of common stock outstanding
at December 31, 2008, and 2007, respectively,
and 500,000,000 shares of common stock authorized at
December 31, 2008 and 2007. The Company has exceeded its shares
authorized by 509,541,638 and 294,736,158 shares at December 31, 2008
and 2007, respectively.
12.
EMPLOYMENT AGREEMENTS
On
December 31, 2008, the registrant entered into one year employment agreements
with each of Sam Klepfish, its CEO, and Justin Wiernasz, its
President. The agreements provide for, among other things, (i)
average annual salaries of $130,000 and $135,000, respectively, (ii) bonuses
(payable one-half in cash and one-half in stock) in the range of 7%-50% of
salary based upon the registrant meeting certain revenue and gross margin
milestones, (iii) four month severance upon termination, and (iv) restrictions
on confidentiality, competition and solicitation.
SAM
KLEPFISH
In 2008,
the Company and its Chief Executive Officer Sam Klepfish were parties
to an oral agreement which provided, among other things:
|
●
|
Mr.
Klepfish is to receive a monthly salary in the amount of
$10,028
|
|
●
|
Mr.
Klepfish received an additional monthly salary of $4,500
which is not paid in cash, but is recorded on a monthly basis as a
convertible note payable. These notes payable are convertible into common
stock of the Company at a rate of $0.005 per
share.
|
On
December 31, 2008, the registrant entered into one year employment agreements
with Sam Klepfish. The agreement provides for, among other things,
(i) average annual salary of $130,000; (ii) bonuses (payable one-half
in cash and one-half in stock) in the range of 7%-50% of salary based upon the
registrant meeting certain revenue and gross margin milestones; (iii)
four month severance upon termination, and (iv) restrictions on confidentiality,
competition and solicitation.
JUSTIN
WIERNASZ
In 2008,
Mr. Wiernasz was under an employment agreement dated May 18, 2007
that expired on September 13, 2008 pursuant to which he was compensated at an
annual rate of $120,000. The agreement also provided for the earning of a bonus
of 10% of his salary, up to 50%, for each $100,000 of incremental profits we
make over the previous year.
On
January 22, 2008, our Board approved the grant of an aggregate of 3 restricted
million shares and 5 million in options exercisable for five years at an
exercise price of $0.007 per share to Mr. Wiernasz, upon his appointment as
President of Innovative Food Holdings, all of which vested on December 31,
2008.
On
December 31, 2008, the registrant entered into one year employment agreements
with Justin Wiernasz . The agreement provide for, among other things, (i)
average annual salary of $130,000; (ii) bonuses (payable one-half in cash and
one-half in stock) in the range of 7%-50% of salary based upon the registrant
meeting certain revenue and gross margin milestones; (iii) four month severance
upon termination; and (iv) restrictions on confidentiality, competition and
solicitation.
13.
COMMITMENTS AND CONTINGENCIES
On
October 17, 2008, we entered into a three-year lease with Grand Cypress
Communities, Inc. for new premises consisting of 4,000 square feet at 3845 Beck
Blvd., Naples, Florida. The commencement date of the lease
is January 1, 2009. The annual rent and fees under the lease is
approximately $54,000. The lease provides for a buyout option at the
end of the lease with credit towards the purchase price received for the rental
payments made during the term of the lease
At
December 31, 2008, commitments for minimum rental payments were as
follows:
|
For
the twelve months ended:
|
||||
|
December
31, 2009
|
$ | 54,000 | ||
|
December
31, 2010
|
54,000 | |||
|
December
31, 2011
|
54,000 | |||
|
Thereafter
|
-- | |||
|
Total
|
$ | 162,000 | ||
14. MAJOR
CUSTOMER
The
Company’s largest customer, US Foodservice, Inc. and its affiliates,
accounted for approximately 97% and 95% of total
sales in the years ended December 31, 2008 and 2007, respectively. A
contract with Next Day Gourmet, LP, a subsidiary of U.S. Foodservice, expires in
September, 2009. We believe that although a significant portion of
our sales occur through Next Day Gourmet, the success of the program is less
contingent on a contract then on the actual performance and quality of our
products.
15. GOING
CONCERN
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going
concern. The Company has reported a loss of
$2,421,122 for the year ended December 31, 2008, and had an
accumulated deficit of $7,433,454 as of December 31,
2008. The Company’s net loss of $2,421,122 was
generated primarily by non-cash transactions, including non-cash losses of
$220,564 from the revaluation of penalty shares for late registration, $99,960
on the value of warrants issued in excess of discounts on notes payable,
$582,541 on the revaluation of the warrant liability, $114,945 for
the new conversion options, and $182,583 for the revaluation of the conversion
option liability, $168,620 on the extinguishment of debt, $78,137 for the
amortization of the discount on notes payable, and $135,360 for the amortization
of the discount on accrued interest. The Company cannot be certain that
anticipated revenues from operations will be sufficient to satisfy its ongoing
capital requirements. Management believes the Company will generate
sufficient capital from operations and from debt and equity financing in order
to satisfy current liabilities in the succeeding twelve
months. Management’s belief is based on the Company’s operating
plane, which in turn is based on assumptions that may prove to be
incorrect. If the Company’s financial resources are insufficient the
Company may require additional financing in order to execute its operating plan
and continue as a going concern. The Company cannot predict whether
this additional financing will be in the form of equity or debt, or be in
another form. The Company may not be able to obtain the necessary additional
capital on a timely basis, on acceptable terms, or at all. In any of
these events, the Company may be unable to implement its current plans for
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 the financial statements which would be
necessary should the Company not be able to continue as a going
concern.
16. AMENDMENTS
TO FINANCIAL STATEMENTS
By
letters dated November 7, 2008 and March 6, 2009, the
Company received comments from the SEC to its Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2007. As such, the Company has
amended its financial statements for the twelve months ended December
31, 2007.
In the
table below are the areas of major changes in tabular format for the year ended
December 31, 2007:
|
Previously
Reported
|
Adjustment
|
Restated
Amount
|
||||||||||
|
Current
liabilities
|
$
|
3,954,080
|
$
|
(107,659
|
)
|
$
|
3,846,421
|
|||||
|
Total
liabilities
|
3,970,163
|
(107,659
|
)
|
3,862,504
|
||||||||
|
Additional
paid-in capital
|
737,462
|
1,094,945
|
1,832,407
|
|||||||||
|
Accumulated
deficit
|
(4,025,046
|
)
|
987,286
|
(5,012,332
|
)
|
|||||||
|
Total stockholders’
deficiency
|
(3,269,405
|
)
|
107,659
|
(3,161,746
|
)
|
|||||||
|
Total
liabilities and (deficiency in) stockholders' equity
|
700,758
|
-
|
700,758
|
|||||||||
|
Selling,
General and administrative expenses
|
1,732,105
|
17,087
|
1.749,192
|
|||||||||
|
Total
operating expenses
|
(50,332
|
)
|
(17,087
|
)
|
(67,419
|
)
|
||||||
|
Total
other expense
|
611,467
|
(32,550
|
)
|
578,917
|
||||||||
|
Net
loss
|
(661,799
|
)
|
15,463
|
(646,336
|
)
|
|||||||
The
following changes were made to the footnote disclosure of our financial
statements:
Beneficial
conversion features of notes payable:
We have
added to the disclosures regarding the settlement agreement on our note
receivable from Pasta Italiana, and recalculated the impairment recorded on the
note;
We have
recalculated the beneficial conversion features of notes payable, and amortized
the discount on notes payable via the effective interest method over the term of
the related notes;
We have
revised our accounting for stock options issued, and included the revaluation of
the fair value of stock options as compensation expense;
We have
revised our accounting for the extension of one of our notes payable to reflect
an extinguishment loss;
We have
revised our notes payable footnotes to reflect changes to discounts,
amortization of discounts, and losses on the renegotiation of
notes;
We have
revised our accounting and related disclosure regarding the liability for the
conversion feature of notes payable for notes that are paid or converted, so
that these liabilities are revalued at the time of conversion, and credited to
additional paid-in capital;
17.
SUBSEQUENT EVENTS
$200,000
Note Financing
On
December 31, 2008, we completed a debt financing in the amount of $200,000 with
Alpha Capital Anstalt, an entity based in Lichtenstein and our largest
institutional investor. The note provides for 8% annual interest and
is payable in monthly installments of $8,000 commencing on the six-month
anniversary of the note. The note also provides for its conversion
into the registrant’s common stock at an initial conversion price of $0.005 per
share. We also issued to the lender a five-year common stock purchase
warrant to acquire 40 million shares of our common stock at an initial exercise
price of $0.011 per share. The note and the warrant are subject to
the terms of a subscription agreement that provides, among other things, for
piggy-back registration rights for the shares underlying the note and warrant,
adjustments to the note conversion price and warrant exercise price if shares
are issued below such prices, and a security interest in the registrant’s
assets.
As part
of the transaction, effective on January 1, 2009, we also entered into an
Amendment, Waiver and Consent Agreement with the lender, Whalehaven Capital Fund
Limited, Asher Brand, Momona Capital, and Lane Ventures, Inc., all of whom are
currently the holder of ours notes that were in default. The
agreement provides for (i) the extension of notes held by such parties to be
extended to dates between April 16, 2009 and January 1, 2010; (ii) imposition of
a default interest rate at an annual rate of 15% on such notes; (iii) the waver
of all future liquidated damages claims arising from such notes; (iv) the waiver
of all current defaults under such notes; and (v) the conversion of an aggregate
of $771,956 of currently due and payable liquidated damages into new 8% notes
with an aggregate face value of $328,744 convertible into the registrant’s
common stock at a conversion price of $0.005 per share.
Pasta
Settlement Agreement
Pasta
made several payments required by the settlement agreement, totaling
$19,000 . (See note 3). In February 2009 after Pasta
Italiana had missed several payments, and after discussions with Pasta Italiana
to work out a modified payment schedule, we sent Pasta a notice
of default. Pasta failed to cure its default within the
required time period after a Notice of Default was sent. We are
continuing discussions with Pasta in regards to resuming payments and continue
to examine all legal remedies available to us to insure compliance with the
agreement. We intend to aggressively pursue in a cost efficient manner the
monies owed to us under the Pasta settlement agreement
ITEM 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
Under the
supervision and with the participation of our principal executive officer and
principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the Exchange
Act). Accordingly, we concluded that our disclosure controls and procedures as
defined in Rule 13a-15(e) under the Exchange Act were effective as of
December 31, 2008 to ensure that information required to be disclosed in
reports we file or submit under the Exchange Act is recorded, processed, and
summarized and reported within the time periods specified in SEC rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
an issuer in the reports that it files or submits under the Act is accumulated
and communicated to the issuer’s management, including its principal executive
and principal financial officers, or persons performing similar functions as
appropriate to allow timely decisions regarding required
disclosure. Subject to the inherent limitations described below and
the exception disclosed in the next sentence, our management has concluded that
our internal control over financial reporting was effective as of
December 31, 2007 and 2008 at the reasonable assurance
level. However, the above notwithstanding, our internal controls and
procedures for the year ended December 31, 2007 were deficient in one respect as
our management’s report on internal control on financial reporting was
inadvertently omitted from the filing of the 2007 annual
report.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) and 15d-(f) under
the Exchange Act. Our internal control over financial reporting are designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes
in accordance with U.S. generally accepted accounting principles. Our internal
control over financial reporting includes those policies and procedures
that:
(i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
(ii) provide
reasonable assurance that transactions are recorded as necessary to permit the
preparation of our consolidated financial statements in accordance with U.S.
generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and
directors; and
(iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on the consolidated financial statements.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008 and 2007. In making this assessment,
management used the criteria set forth in Internal Control Over Financial
Reporting — Guidance for Smaller Public Companies issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Subject
to the inherent limitations described in the following paragraph, our management
has concluded that our internal control over financial reporting was effective
as December 31, 2008 and 2007 at the reasonable assurance
level.
Inherent
Limitations Over Internal Controls
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations, including
the possibility of human error and circumvention by collusion or overriding of
controls. Accordingly, even an effective internal control system may not prevent
or detect material misstatements on a timely basis. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may
deteriorate. Accordingly, our internal controls and procedures are
designed to provide reasonable assurance of achieving their
objectives.
Changes
in Internal Control over Financial Reporting
We have
made no change in our internal control over financial reporting during the last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Attestation
Report of the Registered Public Accounting Firm
This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our independent
registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only management’s report in this annual report on Form
10-K.
ITEM 9B. Other
Information
None.
PART
III
ITEM 10. Directors, Executive Officers and Corporate
Governance
Set forth
below are the directors and executive officers of our Company, their respective
names and ages, positions with our Company, principal occupations and business
experiences during at least the past five years.
|
Name
|
Age
|
Position
|
|
Sam
Klepfish
|
37
|
Chief
Executive Officer
|
|||
|
Justin
Wiernesz
|
42
|
President
|
|||
|
Michael
Ferrone
|
61
|
Director
|
|||
|
Joel
Gold
|
67
|
Director
|
Directors
Sam
Klepfish
From
November 2007 to present Mr. Klepfish is the CEO of Innovative Food Holdings and
it’s subsidiary Food Innovations. Since March 2006 Mr. Klepfish was
the interim president of the Company and it’s subsidiary.
Since February 2005 Mr. Klepfish was also a Managing Partner
at ISG Capital, a merchant bank. From May 2004 through February
2005 Mr. Klepfish served as a Managing Director of Technoprises,
Ltd. From January 2001 to May 2004 he was a corporate finance
analyst and consultant at Phillips Nizer, a New York law firm. Since
January 2001 Mr. Klepfish has been a member of the steering committee of
Tri-State Ventures, a New York investment group. From 1998 to December 2000, Mr.
Klepfish was an asset manager for several investors in small-cap
entities
Joel
Gold, Director
Joel Gold
is currently head of investment banking of Andrew Garrett, Inc., an
investment-banking firm located in New York City, a position he has held since
October 2004. From January 2000 until September 2004, he served as
Executive Vice President of Investment Banking of Berry Shino Securities, Inc.,
an investment banking firm also located in New York City. From January 1999
until December 1999, he was an Executive Vice President of Solid Capital
Markets, an investment-banking firm also located in New York City. From
September 1997 to January 1999, he served as a Senior Managing Director of
Interbank Capital Group, LLC, an investment banking firm also located in New
York City. From April 1996 to September 1997, Mr. Gold was an Executive
Vice President of LT Lawrence & Co., and from March 1995 to April 1996, a
Managing Director of Fechtor Detwiler & Co., Inc., a representative of the
underwriters for the Company’s initial public offering. Mr. Gold was a
Managing Director of Furman Selz Incorporated from January 1992 until March
1995. From April 1990 until January 1992, Mr. Gold was a Managing Director
of Bear Stearns and Co., Inc. (“Bear Stearns”). For approximately 20 years
before he became affiliated with Bear Stearns, he held various positions with
Drexel Burnham Lambert, Inc. He is currently a director, and serves on the
Audit and Compensation Committees, of Geneva Financial Corp., a publicly held
specialty, consumer finance company.
Michael
Ferrone, Director
Michael
Ferrone was Executive Producer and Producer, Bob Vila TV Productions, Inc from
its founding in 1989 to 2000. Michael co-created and developed the T.V. show,
"Bob Vila's Home Again". As Executive Producer, Michael managed all aspects of
creation, production, and distribution of the Show. By integrating brand
extension and sponsor relations, Michael managed the interrelationships between
Bob Vila and business partners including senior executives at Sears, NBC, CBS,
A&E, HGTV, General Motors, and Hearst Publications. In 2002 he co-founded
Building Media, Inc., (BMI) a multimedia education, marketing and
production company committed to promoting best building practices through better
understanding of building science principles. As of 2005, BMI operates as an
independently managed, wholly owned subsidiary of DuPont™.
Executive
Officers
Justin
Wiernasz, President
Effective
on July 31, 2008, Mr. Justin Wiernasz, age 42, was promoted to the position of
President of Innovative Food Holdings, Inc. Prior thereto he
was the Executive Vice President of Marketing and Sales and Chief Marketing
Officer of our operating subsidiary, Food Innovations, Inc. since May 2007 and
the President of Food Innovations and our Chief Marketing Officer since December
2007. Prior thereto, he was at U.S. Foodservice, our largest customer
for 13 years. From 2005 to 2007 he was the Vice President of Sales &
Marketing, U.S. Foodservice, Boston, and prior thereto, from 2003 to 2005 he was
a National Sales Trainer at U.S. Foodservice, Charleston SC, from 1996 to 2003
he was the District Sales Manager at U.S. Foodservice, Western Massachusetts and
from 1993 to 1996 he was Territory Manager, U.S. Foodservice, Northampton,
Easthampton & Amherst, MA. Prior to that from 1989 to 1993 he was the owner
and operator J.J.’s food and spirit, a 110 seat restaurant.
Key
Employees
John
McDonald
Mr.
McDonald, age 47, has been the Chief Information Officer of IVFH
since November 2007. From 2004 through 2007, Mr. McDonald
worked as a consultant with Softrim Corporation of Estero, Florida where he
created custom applications for a variety of different industries and assisted
in building interfaces to accounting applications. Since 1999 he has also been
President of McDonald Consulting Group, Inc. which provide consulting on
accounts receivable, systems and accounting services.
Z.
Zackary Ziakas
Mr.
Ziakas was the Chief Operating Officer of Innovative Food Holdings and our
subsidiary, Food Innovations, Inc. and has held that position since September
2004. From November 2001 through September 2004 Mr.
Ziakas was the V.P. of Logistics of our subsidiary Food
Innovations. Prior to that Mr. Ziakas was a manager at Mail Boxes
Etc.
Effective
July 31, 2008, Mr. Ziakas resigned his position as our Chief Operating Officer
and assumed the non-executive officer position of Vice President of
Procurement. Mr. Ziakas’ existing employment agreement has been
terminated and he will continue working for us as an employee-at–will with an
annual salary of $105,000.
THE COMMITTEES
The Board
of Directors does not currently have an Audit Committee, a Compensation
Committee, a Nominating Committee or a Governance Committee. The usual functions
of such committees are performed by the entire Board of Directors. We
are currently having difficulties attracting additional qualified directors,
specifically to act as the audit committee financial expert, inasmuch as
we have only limited resources to purchase D & O
insurance. However, we believe that at least a majority of our
directors are familiar with the contents of financial
statements.
Attendance
at Meetings
During
2008 the Board of Directors met four times and all Directors attended each
meeting and the Board also took action through written consent another three
times.
We are
not currently subject to the requirements of any stock exchange with respect to
having a majority of “independent directors” although we believe that we meet
that standard inasmuch as Messrs. Gold and Ferrone are “independent” and only
Mr. Klepfish, by virtue of being our Chief Executive Officer, is not
independent.
Code
of Ethics
We have
adopted a Code of Ethics that applies to each of our employees, including our
principal executive officer and our principal financial officer, as well as
members of our Board of Directors. We have previously filed a copy of such Code
has been publicly filed with, and is available for free from, the Securities and
Exchange Commission.
Section
16(a) Beneficial Ownership Reporting Compliance
During
2008 each Director did not file one Form 4 for the issuance of 5 million options
and Mr. Klepfish did not file 12 Forms 4 to report the issuance of 12
convertible notes received in lieu of salary. To our knowledge, based upon
responses to questions we directed to such filing persons, none of said filing
persons have made any “short-swing” sales under the provisions of Section 16(b)
of the Exchange Act.
ITEM 11. Executive Compensation
The
following table sets forth information concerning the compensation for services
in all capacities rendered to us for the year ended December 31, 2008, of our
Chief Executive Officer and our other executive officers whose annual
compensation exceeded $100,000 in the fiscal year ended December 31, 2008, if
any. We refer to the Chief Executive Officer and these other officers as the
named executive officers.
SUMMARY
COMPENSATION TABLE
|
Name
and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
||||||||||||||||||||||||||
|
Sam
Klepfish
|
2008
|
$ | 184,000 |
(e)
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 184,000 | |||||||||||||||||
|
CEO
|
2007
|
$ | 172,577 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 172,577 | ||||||||||||||||||
|
2006
|
(a)
|
$ | 115,697 |
(b)
|
$ | - | $ | 17,500 |
(c)
|
$ | 22,500 |
(g)
|
$ | - | $ | - | $ | - | $ | 155,697 | |||||||||||||||
|
Justin
Wiernesz
|
2008
|
(e)
|
$ | 114,000 | $ | - | $ | 24,000 |
(f)
|
$ | 39,999 |
(g)
|
$ | - | $ | - | $ | - | $ | 177,999 | |||||||||||||||
|
President
|
2007
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | - | |||||||||||||||||||
|
2006
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||||||||
|
(a)
|
Mr.
Klepfish became and executive officer in March 2006 and was the principal
executive officer since August 14, 2006.
|
|
(b)
|
Consists
of $106,697 cash salary paid, and an additional $9,000 salary
accrued,which is convertible into shares of common stock at the
election of Mr. Klepfish at a rate of $0.005 per share.
|
|
(c)
|
Consists
of 350,000 shares of common stock
|
|
(d)
|
Consists
of options to purchase 5,000,000 shares of the Company's common stock
at a price of $0.005 per share.
|
|
(e)
|
Consists
of $130,000 cash salary paid and an additional $54,000 salary accrued,
which is convertible into shares of common stock at the election of Mr.
Klepfish at a rate of $0.005 per share.
|
|
(f)
|
Consists
of 3,000,000 shares of common stock to be issued pursuant to an employment
agreement.
|
|
(g)
|
Consists
of options to purchase 5,000,000 shares of the Company's common stock at a
price of $0.007 per
share.
|
Outstanding
Equity Awards at Fiscal Year-End as of December 31, 2008
|
Option
Awards
|
Stock
Awards
|
|
Name
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
Option
Exercise Price
($)
|
Option
Expiration Date
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
|
Market
Value of Shares or Units of Stock That Have Not Vested
($)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
That Have Not Vested
(#)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
Other Rights That Have Not Vested
($)
|
|||||||||
|
Justin
Wiernasz
|
5,000,000
|
-
|
-
|
$0.007
|
03/31/2013
|
-
|
-
|
-
|
-
|
Director
Compensation
|
Name
|
Fees
Earned
or
Paid in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||
|
Joel
Gold
|
-
|
-
|
39,999
|
(a)
|
-
|
-
|
-
|
39,999
|
||||||||||||||||||||
|
Michael
Ferrone
|
-
|
-
|
39,999
|
(a)
|
-
|
-
|
-
|
39,999
|
||||||||||||||||||||
|
Sam
Klepfish
|
-
|
-
|
39,999
|
(a)
|
-
|
-
|
-
|
39,999
|
||||||||||||||||||||
(a)
Consists of 5,000,000 options to purchase shares of common stock at a price of
$0.007 per shares. The options expire on March 31, 2013.
Employment
Agreements
Food
Innovations, Inc. has employment agreements with certain officers and
certain employees. The employment agreements provide for
salaries and benefits, including stock grants and extend up to five
years. In addition to salary and benefit provisions, the agreements
include defined commitments should the employer terminate the employee with or
without cause.
In 2008
the Company and its Chief Executive Officer Sam Klepfish are parties to an oral
agreement which provided, among other things:
|
●
|
Mr.
Klepfish is to receive a monthly salary in the amount of
$10,028
|
|
●
|
Mr.
Klepfish received an additional monthly salary of $4,500
which is not paid in cash, but is recorded on a monthly basis as a
convertible note payable. These notes payable are convertible into common
stock of the Company at a rate of $0.005 per
share.
|
On
December 31, 2008, the registrant entered into one year employment agreements
with Sam Klepfish. The agreement provide for, among other things, (i) average
annual salary of $130,000; (ii) bonuses (payable one-half in cash and
one-half in stock) in the range of 7%-50% of salary based upon the registrant
meeting certain revenue and gross margin milestones; (iii) four month severance
upon termination; and (iv) restrictions on confidentiality, competition and
solicitation.
JUSTIN
WIERNASZ
In 2008
Mr. Wiernasz was under an employment agreement dated May 18, 2007
that expired on September 13, 2008 pursuant to which he was compensated at an
annual rate of $120,000. The agreement also provided for the earning of a bonus
of 10% of his salary, up to 50%, for each $100,000 of incremental profits we
make over the previous year.
On
January 22, 2008, our Board approved the grant of an aggregate of 3 restricted
million shares and 5 million in options exercisable for five years at an
exercise price of $0.007 per share to Mr. Wiernasz, upon his appointment as
President of Innovative Food Holdings, all of which vested on December 31,
2008,
On
December 31, 2008, the registrant entered into one year employment agreements
with Justin Wiernasz. The agreement provide for, among other things, (i) average
annual salary of $130,000; (ii) bonuses (payable one-half in cash and one-half
in stock) in the range of 7%-50% of salary based upon the registrant meeting
certain revenue and gross margin milestones; (iii) four month severance upon
termination; and (iv) restrictions on confidentiality, competition and
solicitation.
Z.
ZACKARY ZIAKAS
Food
Innovations, Inc. and Z. Zackary Ziakas are parties to an employment agreement
which provides, among other things:
|
●
|
That
Mr. Ziakas will serve as the Company’s Chief Operating
Officer,
|
|
|
●
|
For
a term of five (5) years, commencing May 17, 2004, subject to earlier
termination by either party in accordance with the Employment
Agreement,
|
|
|
●
|
The
Mr. Ziakas’ salary shall be $95,00 per annum, payable by the Company in
regular installments in accordance with the Company’s general payroll
practices,
|
|
|
●
|
Salary
will automatically increase by 10% on a yearly basis.
|
|
As
described above, Mr. Ziakas' employment arrangement has since been
terminated and replaced.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Unless
otherwise stated, each person listed below uses the Company’s
address. Pursuant to SEC rules, includes shares that the person has
the right to receive within 60 days.
|
Name
and Address of
|
Number
of Shares
|
Percent
of
|
||||||||
|
Beneficial
Owners
|
Beneficially
Owned
|
Class
|
||||||||
|
Sam
Klepfish
|
39,978,345 | (1 | ) | 21.8 | % | |||||
|
Michael
Ferrone
|
89,437,310 | (2 | ) | 44.1 | % | |||||
|
Joel
Gold
|
36,127,871 | (3 | ) | 17.2 | % | |||||
|
Justin
Wiernasz
|
8,000,000 | (4 | ) | 4.4 | % | |||||
|
Joseph
DiMaggio Jr.
|
14,800,000 | (5 | ) | 8.5 | % | |||||
|
Christopher
Brown
|
15,000,000 | (6 | ) | 8.6 | % | |||||
|
Wally
Giakas
|
22,504,471 | (7 | ) | 11.5 | % | |||||
|
All
officers and directors as
|
||||||||||
|
a
whole (4 persons)
|
170,543,526 | 57.7 | % | |||||||
|
(1)
|
Includes
350,000 shares of common stock held by Mr. Klepfish. Also includes options
to purchase 10,000,000
shares of the Company's common stock, 27,000,000 shares issuable upon the
conversion of notes payable, and 2,628,345 shares issuable upon the
conversion of accrued interest.
|
||||||||||
|
(2)
|
Includes
43,600,000 shares of common stock held by Mr. Ferrone, and an aggregate of
420,000 shares held by
relatives of Mr. Ferrone. Also includes 4,000,000
shares issuable upon conversion of notes held relatives of Mr. Ferrone,
and 15,000,000 shares issuable upon conversion of a note
payable. Also
includes 14,978,192 shares issuable upon conversion of accrued
interest on notes payable held by Mr. Ferrone, and 1,439,118 shares
issuable upon conversion of accrued interest on notes held by
relatives of Mr. Ferrone. Also
includes options to purchase 10,000,000 shares of the Company's
common stock held by Mr.
Ferrone.
|
||||||||||
|
(3)
|
Includes
1,000,000 shares of common stock held by Mr. Gold, and 920,000 shares held
by Mr. Gold’s spouse; options to purchase
10,000,000 shares of common stock; 16,000,000
shares issuable upon conversion of notes held by Mr. Gold, and
8,207,871 shares issuable upon
conversion of accrued interest on notes held by Mr.
Gold.
|
||||||||||
|
(4)
|
Includes
options to purchase 5,000,000 shares of common stock, and 3,000,000 shares
of common stock issuable to Mr. Wiernasz pursuant to an employment
agreement..
|
||||||||||
|
(5)
|
Consists
of 14,800,000 shares of common stock held by Mr. DiMaggio.
|
||||||||||
|
(6)
|
Consists
of 15,000,000 shares of common stock held by Mr. Brown.
|
||||||||||
|
(7)
|
Includes
16,000,000 shares issuable upon conversion of notes payable, and
6,504,471 shares issuable upon conversion of accrued interest
on notes payable.
|
||||||||||
|
|
|||||||||||
ITEM 13. Certain Relationships and Related Transactions, and
Director Independence
At
various times in 2008 and 2007, we entered into note payable agreements with
certain related parties. The information concerning those notes is set forth
below:
|
Note
Holder
|
Relationship
|
Consideration
|
Interest
Rate
|
Conversion
Price
|
Principal
Balance
December
31, 2008
|
Principal
Balance
December
31, 2007
|
|||||||||||||
|
Michael
Ferrone
|
Director
|
Cash
|
8
|
%
|
(a)
|
$
|
0.005
|
75,000
|
75,000
|
||||||||||
|
Joel
Gold
|
Director
|
Cash
|
8
|
%
|
$
|
0.005
|
50,000
|
50,000
|
|||||||||||
|
Joel
Gold
|
Director
|
Cash
|
8
|
%
|
$
|
0.005
|
25,000
|
25,000
|
|||||||||||
|
Joel
Gold
|
Director
|
Cash
|
8
|
%
|
$
|
0.005
|
25,000
|
25,000
|
|||||||||||
|
Lauren
M. Ferrone (child of Michael Ferrone)
|
Child
of Director
|
Cash
|
8
|
%
|
(a)
|
$
|
0.005
|
10,000
|
10,000
|
||||||||||
|
Richard
D. (child of Michael Ferrone)
|
Child
of Director
|
Cash
|
8
|
%
|
(a)
|
$
|
0.005
|
10,000
|
10,000
|
||||||||||
|
Christian
D. (child of Michael Ferrone)
|
Child
of Director
|
Cash
|
8
|
%
|
(a)
|
$
|
0.005
|
10,000
|
10,000
|
||||||||||
|
Andrew
I. Ferrone (child of Michael Ferrone)
|
Child
of Director
|
Cash
|
8
|
%
|
(a)
|
$
|
0.005
|
10,000
|
10,000
|
||||||||||
|
Sam
Klepfish
|
Director
and CEO
|
Employment
Services
|
8
|
%
|
$
|
0.005
|
63,000
|
9,000
|
|||||||||||
(a) In
default at December 31, 2008, and 2007.
During
the year ended December 31, 2008, the Company had the following transactions
with related parties:
The
Company issued 32,000,000 shares of common stock for the conversion of the
$160,000 convertible note from Michael Ferrone.
The
Company committed to issue 3,000,000 shares of common stock to the Company’s
President as a bonus for past service. As of December 31, 2008, the
fair value of these shares in the amount of $24,000 was charged to
operations. As of December 31, 2008 these share have not been issued
and are shown on the balance sheet in accrued liabilities-relater
parties.
ITEM
14. Principal Accountant Fees and
Services
Audit
Fees
The
aggregate fees billed for each of the last two fiscal years for
professional services rendered by Bernstein & Pinchuk LLP
(“Accountant”) for the audit of our annual financial statements, and
review of financial statements included in our Forms 10-QSB and 10-Q: 2008:
$55,000; and 2007: $60,000.
Audit-Related
Fees
The
aggregate fees billed in each of the last two fiscal years for assurance and
related services by Accountant that are reasonably related to the
performance of the audit or review of our financial statements and are not
reported under Audit Fees above: $0
Tax Fees
The
aggregate fees billed in each of the last two fiscal years for professional
services rendered by Accountant: $0.
All Other
Fees
The
aggregate fees billed in each of the last two fiscal years for products and
services provided by Bernstein & Pinchuck, other than the services reported
above: $0.
ITEM 15. Exhibits
|
EXHIBIT NUMBER
|
||
|
3.1
|
Articles
of Incorporation (incorporated by reference to exhibit 3.1 of the
Company’s annual report on Form 10-KSB for the year ended December 31,
2004 filed with the Securities and Exchange Commission on September 28,
2005).
|
|
|
3.2
|
Bylaws
of the Company (incorporated by reference to exhibit 3.2 of the Company’s
annual report on Form 10-KSB for the year ended December 31, 2006 filed
with the Securities and Exchange Commission on April 18,
2008).
|
|
|
4.1
|
Form
of Convertible Note (incorporated by reference to exhibit 4.1 of the
Company’s annual report on Form 10-KSB for the year ended December 31,
2004 filed with the Securities and Exchange Commission on September 28,
2005).
|
|
|
4.2
|
Form
of Convertible Note (incorporated by reference to exhibit 4.2 of the
Company’s annual report on Form 10-KSB for the year ended December 31,
2004 filed with the Securities and Exchange Commission on September 28,
2005).
|
|
|
4.3
|
Form
of Warrant - Class A (incorporated by reference to exhibit 4.3 of the
Company’s annual report on Form 10-KSB for the year ended December 31,
2004 filed with the Securities and Exchange Commission on September 28,
2005).
|
|
|
4.4
|
Form
of Warrant - Class B (incorporated by reference to exhibit 4.4 of the
Company’s annual report on Form 10-KSB for the year ended December 31,
2004 filed with the Securities and Exchange Commission on September 28,
2005).
|
|
|
4.5
|
Form
of Warrant - Class C (incorporated by reference to exhibit 4.5 of the
Company’s annual report on Form 10-KSB for the year ended December 31,
2004 filed with the Securities and Exchange Commission on September 28,
2005).
|
|
|
4.6
|
Secured
Convertible Promissory Note dated December 31, 2008 in favor of Alpha
Capital Anstalt (incorporated by reference to exhibit 10.1 of the
Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 7, 2009).
|
|
4.7
|
Class
B Common Stock Purchase Warrant dated December 31, 2008 in favor of Alpha
Capital Anstalt (incorporated by reference to exhibit 10.2 of the
Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 7, 2009).
|
|
4.8
|
Subscription
Agreement between the Registrant and Alpha Capital
Anstalt dated December 31, 2008 (incorporated by reference to
exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 7, 2009).
|
|
4.9
|
Amendment,
Waiver, and Consent Agreement effective January 1, 2009 between the
Registrant and Alpha Capital Anstalt (incorporated by reference to exhibit
10.4 of the Company’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 7, 2009).
|
|
10.1
|
Lease
of the Company's offices at Naples, Florida (incorporated by
reference to exhibit 10.1 of the Company’s annual report on Form 10-KSB
for the year ended December 31, 2004 filed with the Securities and
Exchange Commission on September 28, 2005).
|
|
|
10.2
|
Security
and Pledge Agreement – IVFH (incorporated by reference to exhibit 10.2 of
the Company’s annual report on Form 10-KSB for the year ended December 31,
2004 filed with the Securities and Exchange Commission on September 28,
2005).
|
|
|
10.3
|
Security
and Pledge Agreement – FII (incorporated by reference to exhibit 10.3 of
the Company’s annual report on Form 10-KSB for the year ended December 31,
2004 filed with the Securities and Exchange Commission on September 28,
2005).
|
|
|
10.4
|
Supply
Agreement with Next Day Gourmet, L.P. with Next Day Gourmet, L.P.
(incorporated by reference to exhibit 10.4 of the Company’s annual report
on Form 10-KSB for the year ended December 31, 2004 filed with the
Securities and Exchange Commission on September 28,
2005).
|
|
|
10.5
|
Subscription
Agreement (incorporated by reference to exhibit 10.5 of the Company’s
annual report on Form 10-KSB for the year ended December 31, 2004 filed
with the Securities and Exchange Commission on September 28,
2005).
|
|
|
10.6
|
Management
contract between the Company and Joseph DiMaggio,
Jr. (incorporated by reference to exhibit 10.2 of the
Company’s annual report on Form 10-KSB for the year ended December 31,
2005 filed with the Securities and Exchange Commission on April 17,
2006).
|
|
|
10.7
|
Management
contract between the Company and Z. Zackary Ziakas (incorporated by
reference to exhibit 10.3 of the Company’s annual report on Form
10-KSB for the year ended December 31, 2005 filed with the Securities
and Exchange Commission on April 17, 2006).
|
|
|
10.8
|
Agreement
and Plan of Reorganization between IVFH and FII. (incorporated by
reference to exhibit 10.6 of the Company’s annual report on Form
10-KSB for the year ended December 31, 2004 filed with the Securities and
Exchange Commission on September 28,
2005).
|
|
|
10.9
|
Employment
Agreement with Sam Klepfish dated as of December 31, 2008 ((incorporated
by reference to exhibit 10.5 of the Company’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 7,
2009).
|
|
10.10
|
Employment
Agreement with Justin Wiernasz dated as of December 31, 2008 (incorporated
by reference to exhibit 10.6 of the Company’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 7,
2009).
|
| 10.11 |
Lease
of the Company's offices at Naples, Florida (incorporated by
reference to exhibit 10.1 of the Company’s current report on
Form 8-K filed with the Securities and Exchange Commission on October
23, 2008).
|
|
14
|
Code
of Ethics (incorporated by reference to exhibit 14 of the Company’s Form
10-KSB/A for the year ended December 31, 2006, filed with the Securities
and Exchange Commission on July 31,
2008).
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
INNOVATIVE
FOOD HOLDINGS, INC.
By: /s/ Sam
Klepfish
Sam
Klepfish, Chief Executive Officer and Director
Dated: April 14,
2009
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Name
|
Title
|
Date
|
||
|
/s/ Sam
Klepfish
|
CEO and
Director
|
April
14, 2009
|
||
|
Sam
Klepfish
|
(Chief
Executive Officer)
|
|||
|
/s/ John
McDonald
|
Principal Accounting
Officer
|
April
14, 2009
|
||
|
John
McDonald
|
(Principal
Financial Officer)
|
|||
|
/s/ Joel
Gold
|
Director
|
April
14, 2009
|
||
|
Joel
Gold
|
||||
|
/s/ Michael Ferrone
|
Director
|
April
14, 2009
|
||
|
Michael
Ferrone
|