INNOVATIVE FOOD HOLDINGS INC - Quarter Report: 2010 June (Form 10-Q)

---

---

 

 

Florida (State of or Other Jurisdiction of Incorporation or Organization)

20-1167761 (IRS Employer I.D. No.)

Large Accelerated filer r	Accelerated filer                   r
Non-accelerated filer    r (Do not check if a smaller reporting company)	Smaller reporting company þ

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Cash Flows	5
	Notes to the Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (including cautionary statement)	35
Item 4.	Controls and Procedures	43
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Reserved by SEC	44
Item 5.	Other Information	44
Item 6.	Exhibits	44
	Signatures	45

		June 30,				December 31,
		2010				2009
ASSETS		(Unaudited)
Current assets
Cash and cash equivalents		$	284,484			$	144,765
Accounts receivable, net of allowance for doubtful accounts			391,784				339,206
Loan receivable, net			140,550				143,050
Inventory			31,224				19,075
Other current assets			5,420				6,120
Total current assets			853,462				652,216
Property and equipment, net			27,159				33,698
		$	880,621			$	685,914
LIABILITIES AND  STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable and accrued liabilities		$	792,324			$	695,361
Accrued liabilities - related parties			166,845				160,845
Accrued interest, net			601,966				576,933
Accrued interest - related parties, net			183,852				170,144
Notes payable, net of discount			891,200				918,907
Notes payable - related parties			345,500				345,500
Warrant liability			1,737,557				631,853
Options liability			348,427				144,627
Conversion option liability			2,634,502				1,384,992
Total current liabilities			7,702,173				5,029,162
Note payable - long term portion			26,210				27,718
Total liabilities			7,728,383				5,056,880
Stockholders’ deficiency
Common stock, $0.0001 par value; 500,000,000 shares authorized;
210,985,103 shares issued and 196,985,103 shares outstanding at
June 30, 2010; 194,638,638 shares issued and 184,638,638
shares outstanding at December 31, 2009			21,099				19,464
Additional paid-in capital			2,405,438				2,197,413
Accumulated deficit			(9,274,299	)			(6,587,843	)
Total  stockholders’ deficiency			(6,847,762	)			(4,370,966	)
		$	880,621			$	685,914

		For the Three				For the Three				For the Six				For the Six
		Months Ended				Months Ended				Months Ended				Months Ended
		June 30,				June 30,				June 30,				June 30,
		2010				2009				2010				2009
Revenue		$	2,288,946			$	1,767,923			$	4,596,907			$	3,368,598
Cost of goods sold			1,815,062				1,384,666				3,584,788				2,572,360
			473,884				383,257				1,012,119				796,238
Selling, general and administrative expenses			552,273				495,029				1,093,638				794,165
Total operating expenses			552,273				495,029				1,093,638				794,165
Operating profit (loss)			(78,389	)			(111,772	)			(81,519	)			2,073
Other (income) expense:
Interest expense			94,487				78,596				171,897				189,765
(Gain) on extinguishment of debt			-				-				-				(222,656	)
Fair value of warrants issued in excess of discount on notes			813,824				-				948,040				-
Loss from change in fair value of warrant liability			143,164				964,694				157,664				254,283
Loss from change in fair value of conversion option liability			506,149				857,500				1,327,336				511,900
Total other expense			1,557,624				1,900,790				2,604,937				733,292
Loss before income taxes			(1,636,013	)			(2,012,562	)			(2,686,456	)			(731,219	)
Income tax expense			-				-				-				-
Net loss		$	(1,636,013	)		$	(2,012,562	)		$	(2,686,456	)		$	(731,219	)
Net loss per share – basic and diluted		$	(0.008	)		$	(0.011	)		$	(0.014	)		$	(0.004	)
Weighted average shares outstanding – basic and diluted			196,985,103				191,114,467				192,277,982				187,366,574

		For the Six				For the Six
		Months Ended				Months Ended
		June 30,				June 30,
		2010				2009
Cash flows from operating activities:
Net loss		$	(2,686,456	)		$	(731,219	)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization			14,618				17,327
(Gain) on extinguishment of debt			-				(222,656	)
Fair value of common stock issued to consultants			6,000				11,200
Fair value of extension in term of warrants issued to noteholders			948,040				-
Fair value of stock options vested by officers and directors			79,442				-
Amortization of discount on notes payable			33,667				29,380
Amortization of discount on accrued interest			61,744				70,136
Allowance for bad debt			11,577				-
Change in fair value of warrant liability			157,664				254,283
Change in fair value of option liability			124,358				35,046
Change in fair value of conversion option liability			1,327,336				511,900
Changes in assets and liabilities:
Accounts receivable, net			(64,155	)			36,398
Inventory and other current assets, net			(11,449	)			(21,129	)
Accrued liability and accrued interest - related party, net			23,807				(9,849	)
Accounts payable and accrued interest			153,987				(37,793	)
Net cash provided by (used in) operating activities			180,180				(56,976	)
Cash flows from investing activities:
Principal payments received on loan			2,500				-
Acquisition of property and equipment			(8,079	)			(7,540	)
Net cash used in investing activities			(5,579	)			(7,540	)
Cash flows from financing activities:
Principal payments on debt			(34,882	)			(2,619	)
Net cash used in financing activities			(34,882	)			(2,619	)
Net increase (decrease) in cash and cash equivalents			139,719				(67,135	)
Cash and cash equivalents at beginning of period			144,765				160,545
Cash and cash equivalents at end of period		$	284,484			$	93,410

 

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	497			$	8
Revaluation of conversion option liability		$	1,327,336			$	511,900
Revaluation of warrant liability		$	157,664			$	254,283
Revaluation of option liability		$	124,358			$	35,046
Common stock issued for consulting contract		$	6,000			$	16,250
Extension of the term of warrants held by note holders		$	948,040			$	-
Conversion of notes payable and accrued interest to common stock		$	57,982			$	-
Common stock issued in error, to be cancelled		$	400			$	-

 

 

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. Also included are non cash costs associated with  stock and options expense and option valuation expense.

 

 

Computer Equipment	3 years
Office Furniture and Fixtures	5 years

 

 

 

(Unaudited)

		For the Three Months								For the Six Months
		June 30,								June 30,
		2010				2009				2010				2009
Option expense		$	50,541			$	-			$	79,442			$	-
Loss on revaluation of options		$	39,998			$	122,477			$	124,358			$	35,047

						Weighted
						Average
		Number of				Exercise
		Shares				Price
Options outstanding at December 31, 2009			53,000,000			$	(a)
Granted			10,500,000				(b)
Exercised			-				-
Cancelled/Expired			-				-
Options outstanding at June 30, 2010			63,500,000			$	(c)
Non-vested			13,250,000				(d)
Vested			50,250,000			$	0.007

Significant Recent Accounting Pronouncements

		June 30, 2010				December 31, 2009
Accounts receivable from customers		$	409,012			$	342,780
Allowance for doubtful accounts			(17,228	)			(3,574	)
Accounts receivable, net		$	391,784			$	339,206

		June 30, 2010				December 31, 2009
Computer equipment		$	314,173			$	305,794
Furniture and fixtures			67,298				67,298
			381,471				373,092
Less accumulated depreciation and amortization			(354,311	)			(339,394	)
Total		$	27,159			$	33,698

		June 30, 2010				December 31, 2009
Trade payables		$	781,019			$	689,075
Accrued payroll and commissions			11,305				6,286
Total accounts payable and accrued liabilities  - non-related parties		$	792,324			$	695,361

June 30, 2010:		Gross				Discount				Net
Non-related parties		$	643,731			$	(41,765	)		$	601,966
Related parties			183,852				-				183,852
Total		$	827,583			$	(41,765	)		$	785,818

December 31, 2009:		Gross				Discount				Net
Non-related parties		$	611,416			$	(34,483	)		$	576,933
Related parties			170,144				-				170,144
Total		$	781,560			$	(34,483	)		$	747,077

 

 

		June 30, 2010				December 31, 2009
Convertible note payable in the amount of $50,000 to Whalehaven dated February 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance. These lapses include not reserving the 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. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $798 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $1,587 and $2,278 was accrued on this note during the six months ended June, 2010 and 2009, respectively.  During the twelve months ended December 31, 2006, $10,000 of principal and $589 of accrued interest was converted into common stock. This note is past due at December 31, 2008. During the year ended December 31, 2009, the noteholder agreed to extend the maturity date to February 15, 2010. During the three months ended June 30, 2010, the noteholder agreed to extend the maturity date to April 15, 2011.			40,000				40,000
Convertible note payable in the amount of $50,000 to Oppenheimer & Co.,  Custodian for Joel Gold IRA, a related party, dated March 14, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was due in full on October 12, 2006. The note is convertible into common stock of the Company at a conversion 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 $998 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of  $1,985 was accrued on this note during the six months ended June, 2010 and 2009, respectively.   This note was past due at June 30, 2010 and December 31, 2009.			50,000				50,000
Convertible note payable in the original amount of $30,000 to Huo Hua dated May 9, 2005. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was due in full on October 12, 2006. The note is convertible into common stock of the Company at a conversion 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 $400 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $795 was accrued on this note during the six months ended June, 2010 and 2009, respectively.  During the twelve months ended December 31, 2006, the note holder converted $10,000 of principal into common stock. This note was past due at June 30, 2010 and December 31, 2009.			20,000				20,000
Convertible note payable in the amount of $25,000 to Joel Gold a board member and related party, dated January 25, 2005. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was due in full on January 25, 2007. The note is convertible into common stock of the Company at a conversion 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 $498 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $991 was accrued on this note during the six months ended June, 2010 and 2009, respectively.  This note was past due at June 30, 2010 and December 31, 2009.			25,000				25,000

		June 30, 2010				December 31, 2009
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 $373 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $742 was accrued on this note during the six months ended June, 2010 and 2009, respectively.  This note was past due at June 30, 2010 and December 31, 2009.			25,000				25,000
Convertible note payable in the amount of $10,000 to Lauren M. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible 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 $200 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $397 was accrued on this note during the six months ended June, 2010 and 2009, respectively.  This note was past due at June 30, 2010 and December 31, 2009.			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 $200 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $397 was accrued on this note during the six months ended June, 2010 and 2009, respectively.  This note was past due at June 30, 2010 and December 31, 2009.			10,000				10,000
Convertible note payable in the amount of $10,000 to Christian D. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible 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 $200 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $397 was accrued on this note during the six months ended June, 2010 and 2009, respectively.  This note was past due at June 30, 2010 and December 31, 2009.			10,000				10,000
Convertible note payable in the amount of $10,000 to Andrew I. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible 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 $200 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $397 was accrued on this note during the six months ended June, 2010 and 2009, respectively.  This note was past due at June 30, 2010 and December 31, 2009.			10,000				10,000

		June 30, 2010				December 31, 2009
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 $160 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $317 was accrued on this note during the six months ended June, 2010 and 2009, respectively.   This note was past due at June 30, 2010 and December 31, 2009.			8,000				8,000
Convertible note payable in the amount of $5,000 to Matthias Mueller dated March 11, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was due in full on October 12, 2006. The note is convertible into common stock of the Company at a conversion 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 $100 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $199 and $200 was accrued on this note during the six months ended June 30, 2010 and 2009, respectively.  This note was past due at June 30, 2010 and December 31, 2009.			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. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $1,995 and $2,393 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $4,304 and $6,832 was accrued on this note during the six months ended June, 2010 and 2009, respectively.  During the three months ended March 31, 2010, the noteholder converted principal in the amount of $20,000 into  common stock.  During the twelve months ended December 31, 2009, the  noteholder  agreed to extend the maturity date of this note until January 1, 2010.  In April 2010, the noteholder agreed to extend the maturity date of this note until June 15, 2010. This note was past due at June 30, 2010.			100,000				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. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $598 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $1,190 and $1,707 was accrued on this note during the six months ended June, 2010 and 2009, respectively.   During the year ended December 31, 2009, the noteholder agreed to extend the maturity date until February 15, 2010. In April, 2010, the noteholder agreed to extend the maturity date of this note until June 15, 2010.			30,000				30,000

		June 30, 2010				December 31, 2009
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. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $300 and $394 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $646 and $1,134 was accrued on this note during the six months ended June, 2010 and 2009, respectively.   During the twelve months ended December 31, 2006, the holder of the note converted $2,000 of principal and $3,667 of accrued interest into common stock, and during the twelve months ended December 31, 2008, the holder of the note converted an additional $3,000 of principal into common stock. During the twelve  months ended December 31, 2009, the holder converted $2,000 of principal and $1,058 of accrued interest into common stock.  During the three months ended March 31, 2010, the holder converted $3,000 of principal and $1,043 of accrued interest into common stock. The noteholder has agreed to extend the maturity date of this note until January 1, 2010.   During the three months ended June 30, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.			15,000				18,000
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. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $258 and $358 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $597 and $1,023 was accrued on this note during the six months ended June, 2010 and 2009, respectively.  During the twelve months ended December 31, 2006, the holder of the note converted $2,000 of principal and $3,667 of accrued interest into common stock, and during the twelve months need December 31, 2008, the holder of the note converted an additional $5,000 principal into common stock.  During the three months ended March 31, 2010, the holder of the note converted $5,000 of principal into common stock. In April 2009, the noteholder agreed to extend the maturity date of this note until January 1, 2010.  During the three  months ended June 30, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.			13,000				18,000

		June 30, 2010				December 31, 2009
Note payable in the amount of $120,000 to Alpha Capital, dated February 7, 2006. The note originally carried interest at the rate of 15% per annum, and was originally due in full on February 7, 2007. The Company was not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at May 8, 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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. In January 2009, the Company extended this note to April 16, 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; 6,000,000 shares 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 $4,487 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $8,926 and $10,674 was accrued on this note during the six months ended June, 2010 and 2009, respectively.  In April 2009, the noteholder agreed to extend this note to April 1, 2009.  During the three  months ended June 30, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.			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 January 2009, the Company extended this note to April 16, 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 $1,122 and $1,496 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $2,256 and $2,602 was accrued on this note during the six months ended June, 2010 and 2009, respectively. In April 2009, the noteholder agreed to extend this note to February 15, 2010. During the three months ended June 30, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.			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-Scholes 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. During the three and six months ended June 30, 2009, $9,477 and $14,220 was amortized to interest expense, respectively. Interest in the amount of $1,496 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $1,496 and $2,976 was accrued on this note during the six months ended June, 2010 and 2009, respectively.  This note was past due at June 30, 2010.			75,000				75,000

		June 30, 2010				December 31, 2009
Note payable in the amount of $10,000 to Alpha Capital, dated May 19, 2006. The note originally carried interest at the rate of 15% per annum, and was originally due in full on November 19, 2006. The Company is not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at February 20 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $373 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $742 and $866 was accrued on this note during the six months ended June, 2010 and 2009, respectively. During the three months ended June 30, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.			10,000				10,000
Twenty-nine convertible notes payable in the amount of $4,500 each to Sam Klepfish, the Company’s CEO and a related party, dated the first of the month beginning on November 1, 2006. Pursuant to the Company’s employment agreement with Mr. Klepfish, the amount of $4,500 in salary is accrued each month to a note payable. These notes bear interest at the rate of 8% per annum and have no due date. These notes and accrued interest are convertible into common stock of the Company at a rate of $0.005 per share. Beneficial conversion features in the aggregate amount of $9,000 for the year ended December 31, 2006, $39,190 for the year ended December 31, 2007, $58,464 for the year ended December 31, 2008, and $8,100 for the three months ended March 31, 2009 were 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 amount of $2,603 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $2,603 and $5,006 was accrued on this note during the six months ended June, 2010 and 2009, respectively.			130,500				130,500
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.Principal and interest in the amounts of $1,672 and $3,345 were paid on this note during the three and six months ended  June 30, 2010 and 2009, respectively.			7,841				10,723
Convertible note payable in the amount of $200,000 to Alpha Capital, dated December 31, 2008. This note bears interest at the rate of 8% per annum, and is due in full on December 31, 2011. Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share. Also issued with this note are warrants to purchase 40,000,000 shares of the Company’s common stock at a price of $0.005 per share. The Company calculated a discount to the note in the amount of $200,000, and recorded $9,261 and $11,577 amortization for this discount during the three months ended March 31, 2010. Interest in the amount of $3,403 and $3,989 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $5,280 and $7,934 was accrued on this note during the six months ended June, 2010 and 2009, respectively. During the twelve months ended December 31, 2009,  the Company made an $8,000 payment on the principle of this note. During the six months ended June 30, 2010, the Company made $32,000 in principal payments on this note.			152,000				184,000

		June 30, 2010				December 31, 2009
Convertible note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $230,000 to Alpha Capital, dated January 1, 2009. This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011. Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share. The Company calculated a discount to the note in the amount of $230,000, and recorded $3,164 and $6,483 amortization for this discount during the three and nine months ended September 30, 2009, respectively. Interest in the amount of $4,587 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $8,360 and $9,074 was accrued on this note during the six months ended June, 2010 and 2009, respectively.			230,000				230,000
Convertible note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $38,000 to Whalehaven Capital, dated January 1, 2009. This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011. Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share. The Company calculated a discount to the note in the amount of $38,000, and recorded $523 and $1,071 amortization for this discount during the three months ended March 31, 2010.  Interest in the amount of $1,420 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $2,256 and $2,809 was accrued on this note during the six months ended June, 2010 and 2009, respectively.			38,000				38,000
Convertible note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $25,310 to Asher Brand, dated January 1, 2009. This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011. Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share. The Company calculated a discount to the note in the amount of $25,310, and recorded $348 of amortization for this discount during the three  months ended March 31, 2010. Interest in the amount of $504 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $801 and $997 was accrued on this note during the six months ended June, 2010 and 2009, respectively.			25,310				25,310
Convertible note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $25,310 to Momona Capital, dated January 1, 2009. This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011. Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share. The Company calculated a discount to the note in the amount of $25,310, and recorded $348 of amortization for this discount during the three months ended March 31, 2010. Interest in the amount of $504 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $801 and $997 was accrued on this note during the six months ended June, 2010 and 2009, respectively.			25,310				25,310
Convertible note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $10,124 to Lane Ventures, dated January 1, 2009. This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011. Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share. The Company calculated a discount to the note in the amount of $10,124, and recorded $139 and $285 amortization for this discount during the three and nine months ended September 30, 2009, respectively. Interest in the amount of $203 was accrued on this note during the three months ended June 30, 2010 and 2009, respectively. Interest in the amount of $322 and $401 was accrued on this note during the six months ended June, 2010 and 2009, respectively.			10,124				10,124
		$	1,719,083			$	1,781,967

 

		Note				Unamortized				Net of
June 30, 2010:		Amount				Discounts				Discount
Notes payable - current portion		$	987,200			$	(96,000)			$	891,200
Notes payable - related parties, current portion			345,500				-				345,500
Notes payable - maturity in the year 2011			386,386				(360,176	)			26,210
Total		$	1,719,086			$	(456,176	)		$	1,262,910

		Note				Unamortized				Net of
December 31, 2009:		Amount				Discounts				Discount
Notes payable - current portion		$	1,014,907			$	(96,000	)		$	918,907
Notes payable - related parties, current portion			345,500				-				345,500
Notes payable - maturity in the year 2011			421,560				(393,842	)			27,718
Total		$	1,781,967			$	(489,841	)		$	1,292,126

		For the Three Months								For the Six Months
		June 30,								June 30,
		2010				2009				2010				2009
Discount on Notes Payable amortized to interest expense:		$	20,615			$	13,748			$	33,667			$	29,380

 

 

		June 30,
		2010				2009
Number of options outstanding			344,248,800				349,448,800
Value at June 30,		$	2,634,502			$	1,990,944
Number of options issued during the period			-				69,348,800
Value of options issued during the period		$	-			$	336,844
Number of options exercised or underlying
notes paid during the period			12,000,000				4,000,000
Value of options exercised or underlying
notes paid during the period		$	77,826			$	7,800
Revaluation (loss) during the period		$	(1,327,336	)		$	(511,900	)
Black-Scholes model variables:
Volatility		188.71 – 266.73		%		364.6-390.59		%
Dividends			-				-
Risk-free interest rates			0.20	%			0.35-0.43	%
Term (years)			10.				10